I went to a mortgage conference last week, and one speaker (who is also an attorney) suggested that within this next Presidential Budget 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. Why are we in need of this type of program? Because buying a house with Student Loans is a millennial, first time home buyer hurdle.
Without a doubt the biggest challenge for millennials who are interested in buying a house with student loans is debt to income ratios. The Speaker seemed to think that the Senate and the House are quickly being forced to face these challenges and the negative drag the more than 1.4 Trillion dollars in Student Loan Debt has on the economy.
Student Loans currently carry a much higher rate than Mortgages, and are subject to variable rates of interest. Additionally, the folks who have an easier time qualifying right now, 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. The most recent attempt from Congress to help with this student loan issue is a bi-partisan bill that gives Employers tax free benefits for paying an employee’s student loan debt. This new employee benefit is only being offered by a handful of companies across the country, but one of the largest employers offering the program is Fidelity Investments located in Raleigh.
I’m skeptical about Congress actually making a new mortgage loan program. 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. HOWEVER, I do think that promoting a program that makes paying off Student Loan Debt a new employee benefit, just like matching 401K’s, is a GREAT idea!
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 3% or 5% down. The 3% option does have some maximum income caps associated with it.
We can also use the NC Housing Finance Agency Down Payment Assistance Programs to help with down payment and closing costs!
Here’s the good news about this program. Fannie Mae now 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 can count $00.00 as the payment for Fannie Mae. We are using what’s on the credit report, assuming that it’s an actual payment.
For Freddie Mac, if you have a $00.00 payment, we are counting .5% of the balance.
Can you provide your Mortgage Loan Officer evidence that you’ve gone OUT of deferred status?
What if you decide to continue being serviced by Navient (for instance) and are now making very low payments on that student loan debt? Can we use the new payments? Absolutely. The Loan officer can then update the credit report to reflect the now current information. You just need to provide us with the paperwork from the Servicer.
What’s the Benefit of using Fannie Mae?
Here’s another benefit of using Fannie Mae… Potential homeowners can qualify if their over all debt to income ratio is below 50% with Fannie Mae. That’s not set in stone, but if you have good credit, and job history, the Fannie Mae “Automated Underwriting System” allows us to go well above the NC Housing hard limit of 43% in North Carolina.
How does the way student loans are calculated 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 Fannie Mae program. Granted they had to come up with a down payment of 3% 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. They might also qualify for down payment assistance with NC Housing!
Can you borrow the down payment with this program?
There’s a 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 maximum DTI for the down payment assistance in NC is now 43.0000%. You can get a gift for the down payment, which will lower your interest rate.
The down payment requirement is 3%. So, if you have it saved, or you can qualify for help from NC Housing, then 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 Mortgage Tax Credit. The spirit of the program is to make it 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 buyers do have income limits that vary based upon the county you buy a house in, and the statewide maximum sales price in 2019 is $275,000. 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.
NOT ALL MORTGAGE COMPANIES IN NC OFFER THIS PROGRAM – shameless plug, that’s why you should call us 919 649 5058
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… again, Freddie Mac is now counting .5% of the balance if you do not have level payments.
Kara says
Thank you so much Eleanor! I am going Freddie Mac and will keep you posted.
Andrea says
With the Freddie Mac mortgage, can you borrow the 5% down payment from a lender?
Eleanor Thorne says
No, unfortunately it needs to be a gift, or the sale of an asset, or savings. It is a great program to help buy a home when you have student loan debt.
Andrea says
I was reading about the NC home advantage loan that offers up to 5% down payment assistance. If you meet income and credit requirements and are applying for either a va, usda or conventional loan. I’m assuming this option cannot be combined with Freddie Mac.
Eleanor Thorne says
Great question! You are correct – The NC Home Advantage program is exclusively a Fannie Mae product 🙁
Amy says
We are trying to refinance with a cash out Va loan to pay off debt. We do have some student loans, most are in more than a 24 month deferment due to being enrolled in school. We have 3 Sallie Mae private loans whose 48 month in school deferment is up. How would these payments factor into the debt to income ratio? What if they were on an income only repayment for 2 years?
Eleanor Thorne says
Amy if you are in NC, we would love to help. VA doesn’t care what type of repayment they are in… so they should not factor. However, the individual Bank can decide that they want to treat them like a FHA loan. We do not.
Amy says
Also, would it be wise to consolidate student loans right before applying for a mortgage?
Eleanor Thorne says
Amy! Yes that’s a great idea!
Porter Carradine says
Nice information!
Jessie says
Hello! I am curious if the “Home Ready” option of Fannie Mae is DTI ratio 41% or less than 45% on that?
Eleanor Thorne says
Jessie I’m so sorry. The “regular” Fannie Mae option will actually go higher than 45% DTI. However, in NC, if you want to use the Down Payment Assistance program, the DTI is 41%. I know this is confusing, but please call us and let us pre-qual you 919 649 5058 for the best option for your situation.
Anonymous says
Hi Eleanor;
Currently, I reside in Oregon, but am looking to move to Vermont in Fall/early Winter of 2019.
1-Student loans-I have about $146,000. in student loan debt, and am on IBR. I pay about $276./month.
2-Bankruptcy-January 2018 will be 2 years since the Chapter 7 discharge in Oregon.
3-Debt-The only credit card I have is a $200.00 secured card acquired so I can re-build my credit score.
4-Credit Score-My c.c.statement shows a credit score of 637. Credit Karma online shows my credit score to be between 651-657.
My annual income is about $51,000.
My questions…
1-Are there any programs that, given my student loan and bankruptcy issues above, would allow me to get a mortgage while I am still residing in Oregon? This would be ideal in that my current income would qualify me rather than my future income.
2-Are there any down payment assistance programs for those of us living out of state who plan to move to Vt? If not, what can I expect for a down pymt?
3-Would I apply in Oregon to these programs or apply in Vermont? Which lenders service these programs?
Thank You!
Eleanor Thorne says
Jean, you will need to wait until after the Bankruptcy has aged for 2 years. If there was a property involved then it’s 3 years. If you are buying a home in VT, while you reside in Oregon, then there are no down payment assistance options. If you purchase a home in VT once you are working there, then you should contact one of the lenders through the VHFA Lenders. These guys are the Pros to deal with what you have in mind. Best Wishes!!!