I went to a mortgage conference last week, and one speaker (who is also an attorney) suggested that with this next Presidential Term we would likely see the introduction of a new “breed” of mortgage loans. These loans, according to the speaker, would have more than a 30 year term, and would be a combination loan designed for folks with Student Loan debt.
Without a doubt the biggest hurdle for millennials who are interested in buying a house with student loans is debt to income ratios. The Speaker seemed to think that the loans would be a combo loan, meaning they would combine a mortgage and Student Loans.
This was really the first time I’ve heard this discussed in serious mortgage circles, and at this point it is only a concept – but as you think about it, you can see the benefits for the banks. Student Loans currently carry a much higher rate than Mortgages. Additionally the folks who have the easier time qualifying for a mortgage are the guys who skipped college and went directly into the work force.
The highly educated, the folks who are likely to have better long-term job stability – are being squeezed out of the home buying market. So somehow securing student loans with some collateral on the house, could be a good credit risk for the bank.
I’m skeptical. We just went through a terrible time when people owed more on the home than it was worth, and I just don’t see how Congress is going to come to agreement on something this big.
Buying a House With Student Loans – Today
Currently, if you want to buy a house and you have Student Loans that are still in deferment, and you are making no payments, your only loan option is a VA Home Loan. With this program, you must be a qualifying Veteran, or part of that household. If the Veteran is buying a house with student loans, those loans will need to be in deferment for 12 months PAST the closing. This is difficult to negotiate, but it can be done.
The “non-Veteran” folks who are buying a house with student loans that are making IBR payments really only have one option too. If you have student loan debt, and the payment is showing on the credit report, we can make you a Conventional Loan, with 5% down.
Here’s the good news about this program. Freddie allows us to take exactly the payment showing on the credit report. The credit report can not say for instance, payments beginning in November when it’s August.
Now, if you have payments that are $00.00, we still have to count 1% of the balance. We are using what’s on the credit report, assuming that it’s an actual payment.
Can you buy a house if you have student loans?
How does the way student loans are calculated this effect purchasing power?
We met with borrowers this morning who have good credit, and a pile of student loan debt. We could qualify them for $100,000 USDA Home Loan with no down payment – or $199,000 house using the Freddie Mac program. Granted they had to come up with a down payment of 5% for the larger house… but, with under $10,000, they were able to buy twice the house because of how Student Loans are viewed by each Agency.
Can you borrow the down payment with this program?
Unfortunately, there’s no down payment assistance available for this program. All state agencies work exclusively with Fannie Mae – so a Conventional Down Payment Assistance Program will yield a situation where the student loan debt is counted against you. You can get a gift for the down payment, but there are no grants available for the Freddie Mac Conventional Loan. The down payment requirement is 5%. So, if you have it saved we are golden. You can also sell an asset (we had one borrower sell a bass boat one time, someone else sold their Cessna to buy a house), or you can get a gift.
Cash you just happen to have on hand is not an acceptable source for the down payment. We’ve recently been working with some folks who just “happen” to have a ton of cash. And obviously there’s no law that says you MUST KEEP YOUR MONEY IN A BANK… But when you are applying for a mortgage, large amounts of “cash on hand” tends to be a problem.
Why? Because an Underwriter generally thinks you are doing this to avoid paying taxes, and honestly, I am pretty sure that IS against the law. A large Cash Deposit for a Mortgage Loan in NC is going to make The Underwriter’s red flag pop-up (and their red pen with LOTS Of conditions will fly out). We must verify that your Earnest Money is NOT tied to new debt, or adding to your existing debt, such as a loan or credit card advance. They’ll also want to know if the money is considered a gift.
Can you get a Mortgage Tax Credit with this program?
Yes! If you have not owned a residence as your primary residence in the past 3 years, you will possibly qualify for the Mortgagee Tax Credit. The spirit of the program is to make possible to bring home as much as $166 more each month, to off set the cost of home ownership. This is in addition to the tax deductions that you receive as a home owner.
The Mortgage Tax Credits for first time home buyer do have income limits that vary based upon the county you buy a house in, and the statewide maximum sales price in 2016 is $245,000. As long as you live in the house, the mortgage tax credit is available to you. On a Conventional loan, it is not going to affect your purchase power, but it’s a great perk to have.
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Options for Buying a House With Student Loans
Folks who are applying or a mortgage with student loans are often caught in the not enough income to work with once you count the 1% balance of the student loans in the equation. Freddie Mac also offers a non-owner occupied option. With this option, you can put a family member on the mortgage with you. There are some “hooks” however, so it’s not as easy as one would hope.