Mortgages

How a Deferred Student Loan Could Keep You From Buying a House

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The cost of your education isn’t just evident in your student loan debt. No, in fact, there is an ulterior cost lurking in the mix: the possibility of being ineligible for a mortgage. If you have a deferred student loan, it usually be will be counted against your income when you apply for the big-ticket debt. If you have a student loan, or multiple student loans, in deferment you’ll need to take extra precautionary steps, working closely with your lender to ensure your chances of getting approved for a mortgage.

The Big Student Loan Obstacles

Credit Reporting

Many student lenders report multiple credit accounts even if you have multiple loans through one lender to finance one education degree – since loans are applied for and disbursed on an enrollment-period basis. So your credit report will show multiple student loans with the same creditor broken down into each loan’s respective payments. This is typical, and it will also likely appear that way on a financial services credit report used by your lender in conjunction with a mortgage application.

Why it’s a concern: If your student loan payment appears to be more, based on how it’s listed on the credit report, the lender has to go by the credit report figures when trying to qualify you for the home loan. In a case like this, it’s essential to get a letter from the creditor stating what the total balance is along with each minimum payment.

Deferred Loans

Depending on the type of student loan, you can be eligible for student loan deferment if you’re enrolled in school at least half-time, or if you’re having an economic hardship. In this case, the mortgage type you apply for is key. For conventional financing, you will need to provide a letter from the creditor identifying what the estimated monthly payments will be as the lender will use the estimated monthly payment in determining if you fit the requirements.

Conversely, a government-insured loan type such as an FHA loan, is a bit more forgiving. If the student loan is deferred for 12 months or longer the lender does not need to account for the liability when qualifying you for the mortgage. The key here is it has to be a 12-month deferment on that the payment obligation associated with the student loan(s).

Why it’s a concern: A student loan could become very problematic if you try to qualify for the maximum loan size. Do your homework, erring on the side of caution by proactively obtaining an estimated payment letter from the creditor for any student loan account in deferment.

Deferred, But Unable to Estimate Payments

Having difficulty in procuring an estimated payment letter from a creditor for the student loan? The lender will still have to account for the liability, so they will instead use a 5% payment factor.

Why it’s a concern: A 5% payment factor is 5% of the principle balance of the student loan, factored monthly! 99% of the time this payment is substantially higher than the minimum monthly payment the student loan obligation would otherwise be. This results in the borrower needing to show more income to qualify, or reducing the mortgage amount and purchase price.

Why Deferred Student Loans Are the Wildcard

Student loans negatively affect your borrowing potential – as they are liability, counted against your income when calculating your ability to make a potential house payment. When you apply for a mortgage, lenders qualify you by taking your monthly pretax income divided by your current payment liabilities and proposed housing payment. This is known in the lending world as a DTI (the debt-to-income ratio), sometimes also called a payment-to-income ratio.

Reducing the Deferred Student Loan Burden

Looking for a mortgage? If you have a student loan, then take heed.

  • Consider getting an additional co-signer for the mortgage (do so carefully, as that carries its risks) – this can give you more income to offset the liability, and increases borrowing chances.
  • Pay off the student loan entirely. This depends on what the minimum payment is and how much of that payment is affecting your qualifying numbers — only your mortgage professional can answer this.
  • Consolidate the student loans. If you haven’t done so already, consolidating the student loans into one low minimum monthly payment encompassing all of the debt can also improve your chances of qualifying.
  • Buy less house. This is easier said than done if you’re already in contract to buy a home. It’s best to handle this upfront when you’re getting pre-approved to initiate the house hunt process.
  • Put more money down. By borrowing less, the proposed monthly payment drops and can make the numbers work in your favor whether you’re buying or remortgaging a home.

Keeping your credit in good standing can also aid your cause, because it can result in lower interest rates, which translate into lower monthly payments. Before you search for a home, it’s important to get your credit in good shape. Get your annual free credit reports to check for any problems that could be hurting your credit, and check your credit scores (which you can do for free on Credit.com) to see where you stand. It’s also important to talk with your lender about your credit, and what moves you can make to get it in better home-buying condition.

Depending on how much mortgage you are trying to qualify for, a deferred student loan may not adversely affect your qualifying chances, as long as your monthly debts (including the proposed mortgage payment) are not more than 40% of your income. Lenders may allow up to 45% of your income as the maximum debt ratio for both conventional and FHA mortgages types. By getting qualified with 40% or less in payment expenses, you’re on the right track to successfully getting your new home loan.

More on Student Loans:

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  • http://www.credit.com/ Credit.com Credit Experts

    Thanks for suggesting that.

  • ScottSheldonLoans

    This works too, consolidating the debts into 1 low monthly payment works as well. Lender’s always also use the minimum payment due.

    • Andy Weber

      Yes, but Direct Consolidation itself does not lower the payments unless it is also combined with an income-related payment plan. It’s a one-two punch!

      • Derek Holland

        My lender, which rhymes with schnicken, is saying they can’t use the payments from my IBR, that they must go with a fully amortized payment. My loans are consolidated and I have been on IBR in repayment (non-zero) for years.

  • Pastor Pat Kaveny

    So is the 5% of the student loan factored monthly mean 5% divided by 12 months, or 5% monthly? If it is divided by 12 months I think our DTI would still be fine for an FHA loan. My wife has a fairly large amount of student loans. They have been on IBR for about 2 years now and the current payment is 0. They may go up some this year, but may still only be about $50.00.

    • ScottSheldonLoans

      The 5% is based on a monthly factor which is why it makes so much more sense to get a payment coupon letter directly from the creditor as this 99% of the time is almost always lower than that conservative underwriting guideline.

  • http://www.credit.com/ Credit.com Credit Experts

    Liz —
    That will be your decision, of course. But if you don’t feel established financially, it’s probably not wise. Houses can come with a number of unanticipated expenses and it’s a good idea to have some extra cash set aside for that. Here’s more: Are You Financially Ready to Buy a House?

  • Priscilla

    I have so much student debt! I am $180k in student debt, but it’s deferred because I am in my master program. My husband and I make a combined salary of $120k a year. Is it possible for us to get approved for a home loan?

    • http://www.credit.com/ Credit.com Credit Experts

      Priscilla —
      Ask a mortgage broker or real estate agent. There are more factors in play than student loan debt and income (amount of mortgage and credit scores, to name two). If you have not already checked your credit reports and begun monitoring your credit scores, we urge you to do so. Here’s how to get your free annual credit reports, and here’s how to monitor your credit score for free.

      • Priscilla

        Thanks for replying! I actually do monitor our credit scores. I know most people don’t.my credit score is relatively high and my husbands is good, but he just started his credit about a year ago.

        • http://www.credit.com/ Credit.com Credit Experts

          You’re welcome! Good for you on forming smart credit hygiene habits early.

  • Derek Holland

    I currently have an FHA mortgage that I started 2 years ago. I am selling my home and purchasing another, putting 10% down, good credit. My wife and I have nearly 200k student loans between us, but we are on IBR, which makes the payments manageable. Now in underwriting for our new home, the lender says they can’t use my IBR payment, they must use an amortized payment. We have been in repayment on our loans for nearly 5 years, no deferments or forbearances in place. Is this true? Why did they wait until a month into the process (they have had our student loan info that long) to decide this? If that’s the case, then nearly no one on a reduced payment plan is going to qualify for a mortgage.

    • http://www.Credit.com/ Gerri Detweiler

      I am taking a stab at this because I don’t know exactly how lenders handle it. But if you look at it from their perspective, you have to quality for IBR each year. If you no longer qualify your payments could rise dramatically and that could affect your ability to handle your mortgage payments. Why they waited a month to tell you that is another story.

    • ScottSheldonLoans

      Derek whats your question exactly?

    • Darren Ledford

      Tell your underwriter to use LP instead of DU. LP will accept the current online payment and they do not have to be fully amortized. Additionally, if you need mortgage insurance…Radian will insure over this as they follow Fannie/Freddie guidelines with no overlays. Hope this helps!

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