More than 65% of the First Time Home Buyers we talk to have some amount of Student Loan Debt. Because there are so many different ways to pay for college now, many of those we talk to have not even started paying for all of the debt they accrued while in college. If you are looking for a mortgage approval with deferred student loans, figuring out what your deferred student payments are going to be, is critical in getting approved to buy a house right now.
An August 2012 study, “Denied? The Impact of Student Debt on the Ability to Buy a House,” found student loans could be a stumbling block for recent graduates who are single or married to a spouse who also has student loans. A separate study by credit bureau Trans Union found the average student debt per borrower jumped 30 percent from $18,379 in 2007 to $23,829 in 2012.
Our experience, however, is that so many people have Student Loans, that it’s really not a “red flag” to underwriters, it’s just another obligation that we have to present in the debt to income ratios. In some cases, we do NOT have to count Deferred Student Loans – in other situations we do.
3 Tips For Mortgage Approval With Deferred Student Loans
Here are some tips for getting a Mortgage Approval if you have Student Loans – these tips apply to ALL home buyers who have student loan debt, not just first time home buyers:
- Be diligent about making your Student Loan Payments on time – especially if you are going to apply for a Government Backed Mortgage loan program like a USDA home loan, FHA Mortgage loan or a Veteran’s home loan (VA Loan). If you have a student loan that’s currently in default, you are not getting another government backed loan right now (see* below).
A history of delinquency on a student loans will not only damage your credit scores, it could also stop you from qualifying for a home loan. This is particularly true if you have a government-backed student loan and apply for a loan from the FHA Home Loan, a Veteran’s Home Loan, or a USDA Home Loan in NC.
We are required to check the federal Credit Alert Verification Reporting System database (CAIVRS) to make sure you are not currently in default on any government loans or obligations (including the IRS), and we are required to include that information in your mortgage application file.
Unfortunately, this report is not normally pulled until after the loan application is fully in process, and all of the documents are gathered by the loan officer. Because “older” student loan delinquencies do not always show up on credit reports, this can be a BIG “Ugh-Oh” after a contract is written.
* If you are currently delinquent on Student Debt – and you contact the folks you owe, set up a repayment plan, and STICK TO THAT PLAN for at least 6 payments, we have been able to get approvals for a FHA and VA mortgage loans.
- Have ALL of the documentation you can find about each of your student loans available for us when we go over your initial loan application. Why? Because you will note below that we are required to count deferred loans from the time of CLOSING. This means that if you apply for a mortgage in April, and we are not closing until the end of July – we need to know what’s going to be deferred as of JULY. We have worked through this many, many times – having contact information and details about each loan will make this process much, much easier for ALL of us.
Bank rules for Mortgage Approval With Deferred Student Loans
FHA Loans: If 12 month deferment or more on Student Loans, we don’t have to count the debt. If there’s LESS than 12 months AT THE TIME OF CLOSING, use 2% of deferred student loan balance* After September 14, 2015 – this is changing. We will be counting ALL Student Loan payments to qualify you, even if the current payment is deferred or set to zero. We must establish a payment, or count 2% of the balance.
USDA: 1% of the deferred student loan balance*, regardless of deferment status.
Conventional: Use 5% of the deferred student loan balance*, regardless of deferment status.
*For ALL loan types, if we can provide supporting documentation from the creditor to show future estimated monthly payments, we can use that figure instead of the guideline. This is an ESPECIALLY important rule to consider when applying for a USDA Home Loan, because they can NOT use an IBR loan to qualify you for a mortgage – meaning if you have an IBR Student Loan Payment, you really MUST convert that to a fixed rate payment. Even if THAT is deferred, we will be counting the payment against you.
- Don’t shop for more student loans while you’re attempting to get a mortgage. We are required to pull your credit report within 72 hours prior to closing and if that report shows new inquiries, you’ll have to sign an explanatory statement. If those new loans are imminent, they might be added to your debt ratios and that could derail your mortgage
Calculating Debt Ratios With Deferred Student Loans
Debt to Income Ratios might be THE MOST critical thing that Mortgage Underwriters look for these days – no matter WHAT mortgage loan program you are applying for. Why is that? Perhaps it’s because of the new regulations that went into place earlier this year, known as the Qualified Mortgage Rules. Although, in NC, we’ve had many of those rules in place for many years, the “wiggle room” by the Automated Underwriting Engines for DTI is tighter now than it ever has been.
The fact that you have student loans or the amount of your deferred student loan debt isn’t as important as your total monthly debt payments. We are looking at the total monthly debt relative to your gross monthly income. This is the calculation known as a debt-to-income ratio, or DTI. Sometimes, those of us who have been in the business forever call it the “Back-End” ratio.
Most mortgage programs require us to calculate a “front-end” ratio, which compares your total monthly housing expense — including your mortgage payment, property tax and homeowner insurance premium, homeowner association dues — to your monthly gross income. In general, the Underwriting engines want to see this ratio no higher than 31%. If you have VERY FEW other debts, we’ve definitely seen this number be higher.
Then we are required to look at the back-end DTI, which includes your housing expenses (front end number) and includes your student loan debt, credit card payments, car loans and other debts with your gross monthly income. Although there are ratio waiver opportunities, for USDA Home Loans, we are currently held to a pretty “hard” ratio of 45.000000% for loan approval. With FHA Home Loans, we can normally go quite a bit higher.
We’ve also put together a guide for Recent College Graduates Looking for Their First Home.
If you are applying for a USDA Home Loan, and you currently have IBR payments, you might consider taking them out of IBR status – so that we can calculate a monthly payment.
With IBR student debt – USDA Home Loan underwriters no longer allow us to simply count $100 per loan, now we must calculate a payment based on 1% of the balance.
For FHA Loans, this is even higher. Beginning 9/14/15 we are required to count 2% of the balance on Deferred Student Loans that have a monthly payment of $00.00.
Child Care Expenses, Energy Expenses and Cell phone bills (for instance) do not get included in DTI ratios for a USDA loan or a FHA Mortgage Loan. VA Loans do look at Child Care and Energy expenses in the ratios.
If your DTI is too high, you’ll need to increase your income or reduce your debt.
FHA Loans and Conventional Loans allow us to include the income from Non-Occupying Co-borrowers. You are allowed to pay off credit card debt to qualify for a mortgage, however, you’ll need to do that before you apply for your mortgage. Paying down debt to qualify for a mortgage is simply not allowed – although getting a gift to pay down that debt IS allowed… the Underwriters generally require you to close the credit cards you pay down, if you do this after you “formally” apply for a mortgage. (READ: This is another reason to call us for a “pre-qualification” session PRIOR to writing a contract to buy a house).
Have a Student Loan or a Car that only has a few payments left? It use to be that if we had an installment debt that had less than 10 payments left – we didn’t have to count that payment in the Debt ratios. Now, it is completely up to the Underwriter. We’ve seen loans with only 5 payments denied by USDA because the underwriter felt that the borrower did not have a long enough history of making payments (carrying debt) that high. This is where payment shock is also considered by the Underwriter – and those who have lived at home, making no payments for a housing expense (and didn’t save a ton of money) have a disadvantage.
Mortgage approval with deferred student loans in 2015 can be like working a really really hard Sudoku puzzle – it takes someone who REALLY knows First Time Home Buyer programs to help you get the numbers to work. That’s where we come in – we deal with SOOO many folks who have various types of deferred student loans, we know what WILL work, and what won’t. Call Steve and Eleanor Thorne 919 649 5058 and get Pre-Qualified today!