Do Mortgage Lenders Look at Deferred Student Loans?

You probably aren’t making Student Loan Payments right now.  Nobody is.  The Government put Student Loan Debt in a deferment, and you don’t have to make payments in 2022.  But maybe you should be making payments.  We take questions on this Blog, and we’ve been asked, “Do Mortgage Lenders Look at Deferred Student Loans?”  The answer is a resounding YES!

In March of 2020 the US Government passed the Cares Act, and with it – made Student Loan Debt “goaway” for millions of people.  This was presumably going to happen for just a few months, but it’s gone on for more than 2 years now.  This is NOT a Political Post.  I’m wanting to give folks information on what they can, and problably SHOULD be doing now so that they can buy a home!

Do Mortgage Lenders Look at Deferred Student Loans?

Yes.  We have to consider the debt.  However, the first thing to consider is that the Deferment of Student Loan Debt is scheduled to expire on August 31, 2022.  So far, there’s been no mention of any extension of the deferment.  That means unless something we haven’t heard about happens – you will be forced to begin making payments September 1st.

If for income reasons, some of your deferred student loans stay, well, deferred – what happens then?

Let’s say you have $100,000 in Student Loan Debt.  If that’s deferred, we still have to count .5% of the balance against you as a payment.  In this case, that would be $500.00.

If you place that $100,000 in Income Based Repayment Plans, and the actual payment is only $175, then there are loan programs that allow us to use $175.  That gives you $325 a month more qualifying power ($500 – $175).

Interest rates are close to where they were when we went into the Pandemic.  So far, we haven’t seen predictions that student loan payments will be substantially higher than they were in February of 2020.

However, The Fed (the guys who really direct interest rates) has said they need interest rates to go higher so that they can stop Inflation.  Higher rates, will generally mean higher student loan payments, and when that happens – trust me – the guidelines for Student Loan Debt will change again.

As a result of this student loan relief, student loan borrowers collectively have saved $5 billion a month.

We have been paying on our Student Loan Debt (for our daughter) during this time.  We figured while it wasn’t accuring Interest, we could have the whole payment go to the debt.  We think this is a good idea for everybody.  READ:  If your student loan debt gets deferred, make some kind of payment anyway.  The idea is to get rid of debt – right?

Do Mortgage Lenders Look at Deferred Student Loans?  YES!

Even if you aren”t REQUIRED to make a payment due to Deferred Student Loans, we count a debt.

And, you SHOULD be figuring out how to buy a house right now, while the cost of housing is coming down.  If you are paying rent, you are paying to build someone else’s wealth.  You are paying someone else’s mortgage.  Your Housing Payment each month is not really HELPING you.  Buying a house creates Generational Wealth.  Meaning, it creates wealth that you can pass on to your family over time.  So buying a house, makes sense, especially now.

If your student loans are in a deferred status, we count them, even if you are not making payments.  If you have them in Income Based Repayment (IBR), and it is REPORTING on the Credit Report, then we can count that payment.

Even if the IBR is a $0 payment, we can count the $0 payment as long as it is reporting to the credit bureau that way.  If the student loan payment reports as DEFERRED, then we count a percentage of the balance, depending on the loan program.

Another question we had was:  “Can we use Student Loan Grants to cover some of our Closing Costs?”  No, you can’t use proceeds you receive from Student Loans to cover your closing costs.  We can’t count Student Loan Proceeds as income either.  It’s to cover the cost of higher education, and that’s what you will need to use the money for.

There are several down payment assistance programs that might help in the purchase of a home, and in North Carolina, we have multiple areas in every county that qualify for USDA Home Loans.  Of all of the mortgage programs available for First Time Home Buyers – USDA Home Loans are our favorite.

The USDA Student Loan Guidelines state that we must calculate qualifications as follows:

“Include the greater of .5% of the outstanding loan balance or the verified fixed payment reflected on the credit report. Income based repayment plans (IBR), graduated repayment plans, adjustable, interest only are all subject to change & the lender must use .5% of the outstanding loan balance as the payment amount.”

Many Loan Officers do not realize this is the case – because of that, borrowers are being told they qualify for a USDA Home Loan, when in fact they don’t.  If your student loan payment is in deferment right this minute (and you are applying for a mortgage) we are required to count .5% of the balance.

A college degree, or Job training that provides some potential for increased earnings MIGHT also be used as a compensating factor for higher qualifying ratios. in North Carolina, the USDA Underwriters have always been one of the USDA compensating factors for a debt ratio waiver that helps first time home buyers.

If you have more questions about Deferred Student Loans and getting a mortgage, call us!  Steve and Eleanor Thorne 919 649 5058 we concentrate our business on First Time Home Buyers and helping them get into their dream homes!  Apply online NOW, and we’ll get right back to you!