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.
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 still have to count 1% of the balance. 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, Fannie Mae is either taking a variable payment, or 1% 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 2017 is $250,000. 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 nw counting .5% of the balance if you do not have level payments.