Youâ€™ve earned your degree and are working to build your career.
You feel your next step is to buy a home.
Thereâ€™s just one challenge. The student loans that helped you get here might make it more difficult to qualify for a mortgage.
Difficult, maybe, but not impossible.
All mortgage programs today have built-in provisions for applicants with deferred student loansÂ as well as loansÂ in repayment.
Recent, and not-so-recent, graduates with student debtÂ can follow a set of guidelines to improve their chances mortgage approval at low interest rates.Click to see today's rates (Oct 20th, 2017)
A recent study by the National Association of REALTORSÂ® and the nonprofit organization American Student Assistance revealed that 71% of student loan holdersÂ say their studentÂ debt will delay homeownership.
More than half said it would sideline home-buying efforts for more than five years.
The perception is real. But are these self-assessments accurate? Maybe not.
Student loans can impact your loan approval status, but perhaps not in the way you think.
The amount you owe isn't as important asÂ your total monthly student loanÂ payment, or the estimate thereof.
Thatâ€™s because lenders will use your debt-to-income (DTI), in part, to determine your worthiness as a borrower.
DTI is a comparison between your income and your debt payments. Lenders prefer this number to be lower than 43%, although they can make exceptions in some cases.
Lenders determine your DTI using the following method.
For instance, an applicant with a gross income of $5,000 and total debt of $2,000 would have a DTI of 40% and would be eligible for approval.
â€śIf the final DTI number is high, such as 50 percent, you probably will not be given a mortgage because half of your gross income will be used to pay down debt,â€ť says Michael Blattman, senior vice president of Tampa, Fla.-based Collegiate Consolidation Services. â€śThis leaves you with very little income to pay for taxes, food, gas, utilities and other monthly expenses.â€ť
But how do lenders calculate your student loan payments?Click to see today's rates (Oct 20th, 2017)
Getting turned down or approved for a lesser amount also happen even if your monthly student loan payments are relatively low but your outstanding balance is high.
This is often the case with borrowers who, because they have a lot of student loan debt, consolidate their loans and shift to income-based repayment (IBR) plans that extend the loanâ€™s term in exchange for lower monthly payments.
â€śThese IBR plans are great for making your monthly payments more affordable, but in this case lenders donâ€™t look at the IBR monthly payment amount. Instead, lenders will only consider the 10-year standard repayment plan amount you were initially given,â€ť says Robert Farrington, a San Diego-based expert on student loans and Millennial money matters.
Deferred student loans present the same problem. While you donâ€™t owe money now, the lender will determine the future actual payment, or a payment based on the balance.
Loans provided by the Federal Housing Administration (FHA) loans, for instance, estimate a payment of 1% of the loan balance for student loans that are not yet due.
High student loans donâ€™t have to be the end of your home-buying endeavors.
You worked your way to a degree. Working your way to homeownership is significantly less difficult. Here are practical steps to do just that.
FHA loans are more lenient than conventional loans when it comes to DTI and credit. Even home buyers with minimal credit history can be approved with alternative credit based on rent, cell phone, and utility payments.
Most recent college grads do not have the cash to make a 20 percent downpayment, but a relative might.
All loan programs allow relatives and even long-standing friends to make all or part of the downpayment for the home buyer. Get into a house sooner by asking for a financial downpayment gift.
Discuss your options for reducing monthly payments with your student loan provider. â€śAlso, it can make sense to refinance your student loans into a longer private loan with a lower interest rateâ€”which could reduce your monthly payment to a point where the DTI works more in your favor,â€ť Farrington says.Click to see today's rates (Oct 20th, 2017)
Prior to applying for a mortgage, try to pay off your outstanding credit card, auto loan, and/or student loan debt.
Retiring a $400-per-month auto loan increases your home buying power. If you canâ€™t pay off a large car loan, try refinancing it into a longer term, or lower interest rate.
â€śAdding a co-borrower to the mortgage loan who brings additional income to the equation will help lower your DTI,â€ť Kelly Koklas, vice president and mortgage banker with Atlanta-headquartered PrivatePlus Mortgage, says.
Mortgage guidelines allow you to buy a home with anyone you choose.
Your lender will estimate your future payments and add them to your DTI, even if your loan is in the deferment period or in forbearance. However, deferring payments could help you better manage your first few years of homeownership, assuming you qualify with your estimated student loan payments.
Mortgage rates are low for all applicants, and home buyers with student loans are no exception.
Get a live rate quote now, before rates rise from multi-year lows. All quotes come with your live credit scores, and it takes just minutes to get started.Click to see today's rates (Oct 20th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)