Since the Great Recession, we’re talking to people with more than $70,000 in Student Loan Debt several times a week. For the most part, these are NOT lawyers or doctors, or folks who are otherwise being paid in excess of $70,000 a year. No, these are folks who have this student loan debt in a deferred status, and generally, don’t have to make payments on their student loans. FHA Mortgage Qualifications and Student Loans in deferment will be more difficult starting in September of 2015.
This is a HUGE change!
I talked to a lady this week who has $38,000 in deferred Student Loans. She wants to buy a house later this summer. We started looking at what her Student Loan payments are going to be – and they total $388 a month. Well, she also has a car payment of $247 a month and two credit card bills that total a minimum payment of $75 a month.
She’s a Teacher, and makes right at $33,000 a year. She also works part-time cleaning vacation homes, and she makes another $10,000 a year working these extra hours. She doesn’t CURRENTLY have to make any payments on the $38,000 in deferred Student Loans… because they are in an IBR repayment schedule.
If she could buy TODAY, and we could get evidence that those loans are in deferment for at least 12 months from the date of closing – we would not have to count the almost $400 a month. However, with the newest FHA Mortgage Qualification and Student Loans update – we WILL have to count those payments when qualifying her to buy a house starting September 14, 2015.
I’m repeating myself here – but this is a HUGE change in FHA Mortgage Qualifying… and other programs are following the same path.
U.S. student loan debt is about $1.1 trillion dollars and has tripled over the last 10 years. FHA is concerned because monthly payments on student loan debt will nearly double in the future, which WILL effect a borrowers ability to repay the loan. Nobody wants to see another Mortgage Meltdown, and deferred Student Loans are seen as a possible ‘interrupting factor’ that could cause thousands of Americans to begin missing house payments.
FHA Mortgage Qualification and Student Loans
Using the lady I spoke to in Hatteras as an example… FHA Mortgage Qualification and Student loans now say count the loan payments in the qualifying ratios, even if you are not currently required to make a payment . This is going to make it impossible for MANY first time home buyers to qualify for a mortgage with their Student Loans.
Let’s take a minute and look at this from the FHA Underwriter’s perspective… if you have $100,000 in Student Loans, and we have to count payments on $100,000 worth of student loan payments against you to qualify to borrow an ADDITIONAL $250,000 for a house… well you are probably not going to qualify.
With this new FHA Mortgage Qualification guideline, Student loan debt is being treated just like any other liability.
You can’t Bankrupt out of Student Loans. They don’t go away… they MUST be paid, just like Taxes. Student Loans are reported (even in their deferred or “forbearance” state) to the credit bureaus. As we now count the monthly Student Loan repayments in FHA Mortgage Qualifications, the monthly student loan payments impacts your debt-to-income qualification ratio and reduces the loan amount borrowers can qualify for.
This SINGLE FHA Guideline will change the First Time Home Buyer “Surge” of buyers in North Carolina, and could easily cause a slow down in this Seller’s Real Estate Market.
Home Buyers with student loan debt who can NOT prove how much their payments will be once they are out of deferment, will be charged 2% of the balance as a payment. AGAIN, with the maximum debt to income ratios from the Automated Underwriting Systems set between 43% and 45% for some mortgage programs – this will LOWER (significantly) the mortgage loan borrowers will qualify for.
How Much Will Student Loan Payments Reduce Mortgage Qualification?
Of course, we are seeing mortgage rates that are in a VERY low 3 – 4% range. So this helps with mortgage qualification power. However, even with low mortgage rates, First Time Home Buyers (and others) with $50,000 in student loan debt payments can reduce a buyers purchasing power by up to $80,000! Or think of it this way, every $250 a month in student loan payments reduces a buyers purchasing power by about $40,000!
There’s a “Silver Lining” for first time home buyers applying for a FHA mortgage loan who can make a 3.5% down payment. The borrowers, who can make a down payment, and who have student loan payments – can still use FHA mortgages to buy a house. FHA Mortgage Qualifications allow home buyers to go up to 50%-55% DTI ratio.
If you are applying for a FHA Mortgage Loan, and you NEED a Mortgage Grant for the down payment – then the maximum debt to income allowed is 45.00000000%
Clarifying this again… with CURRENT FHA mortgage guidelines, we do NOT have to count student loan payments that we can prove have been deferred for more than 12 months.
Your Spouse’s Student Loans May Get Your Home Loan Denied? Yep. Many first time home buyers are shocked at how much their spouse owes in Student Loans. There are no payments being made, so no one really paid attention to the balance. If the income of someone is going to be used, we now are required to look at those Student Loans in mortgage qualifications… even if they are deferred, even if they are a co-borrower on the loan.
On USDA Home Loans, we do not have to count Student Loan payments that have been deferred for more than 24 months. We’ve only seen payments deferred for this length when a borrower was able to PREPAY their Student Loans. Not all Student Loan Servicer’s allow pre-payment for deferred student loans – but some do. Occasionally, Student Loans can be consolidated, to reduce your overall monthly payments.
Deferred Student Loans And Credit Scores
Student loans are being reported to the credit bureau. If you have no payments, then they are reporting every month, with no payment amount. These deferred student loans are constantly getting larger as fees and interest are being added to them. Once payments begin, then of course, the payment history is reported.
Student Loans will hurt your credit scores. The credit scoring formulas will penalize you because you owe more than you initially borrowed…..this is the same as if you are exceeding your credit limit on a revolving credit card….it’s a signal that a borrower is in financial distress. If needing higher credit scores, you may want to consider paying down the student loan balance so that it doesn’t exceed the loan limit.
How To Qualify For A Mortgage With Student Loans
In the situation where a family member is paying the loan, you will need to prove that this has been going on for at least 2 years. If the payments have been made directly to the Student loan Servicer, then we don’t have to count the payment against you (most of the time). If the family member gives YOU the money, and YOU pay the student loans… well that could be difficult to document, but it’s something we should definitely talk about it!
Would it be more beneficial for you to pay off or pay down your student loan debt or save up for a larger down payment? That will depend on your unique situation. Call us, and we can help you create a first time home buyer purchasing plan that works for you.
You might be able to qualify for the house you are dreaming of by adding a family member to the mortgage. Fortunately, FHA does allow for a non-occupying co-borrower. These situations mean that we take all of your income, all of your debts and add all of the other person’s income and all of their debts – and come up with a total qualification.
We think this will be very important in situations where (perhaps) only one spouse has a large amount of student debt. Perhaps the other person can qualify for the mortgage with the help of a family member.
In most of these types of situations, you will NOT qualify for the Mortgage Grant or First Time Home Buyer Tax Credit programs, but this could be the best option for buying a house, if the student loan payments are kicking you out of qualifying.
READ: You will need 3.5% for a down payment if you are adding a non-occupying co-borrower to qualify… UNLESS you talk to us about using a Freddie Mac Conventional Loan. Freddie ALLOWS us to use the IBR Payments reported on the credit Report, they only require 3% down payment, hey have low PMI rates, and in many cases we CAN use a non-occupying co-borrower. BOOM! Solid Solution!
Across the “Internet” you might be reading something that says if your IBR payment can be established, we can use 1% of the Balance or $100 payment for USDA Loans. That is outdated information. We can not use “variable” payment student loan payments. We MUST establish a payment for you to get a USDA Home Loan
We’ve also put together a guide for Recent College Graduates Looking for Their First Home.
You followed the plan. You went to college, you got a job, and now you are ready to buy a home. That’s the American Dream. We understand that. These new FHA Mortgage Qualifications and Student Loans requirements are making that more difficult – but that doesn’t mean it’s impossible! NC First Time Home Buyer Programs can help you do this! Buying your First Home in NC is FUN! If you have more questions about Deferred Student Loans and qualifying for a mortgage… Call Steve and Eleanor Thorne, 919-649-5058 Or leave us a comment below – we try to answer all of your questions! 
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Great write up of the major changes FHA is making regarding deferred student loan debt and mortgage qualifying.
I almost want to edit Nelson Mandella’s quote to include, “but if you have student loans, it may be darn near impossible to qualify for a large enough home to make buying worthwhile.”
I sure hope our legislators rise up against and stop this FHA guideline change, but I don’t think they will.
You shared some good tips on what borrowers can do if they do have student loan debt….well done.
Brad – this is a HUGE issue, that will stall some home buying in NC. I doubt anyone will do anything, but it interesting that Washington is simultaneously rolling out a PAYE expanded plan later this year as part of the Education program. Looks to me like the Education Department isn’t talking to HUD / CFPB
I have a number of 90, 120 student loan lates. They are all less than a year old. The loans are now marked paid as full (due to consolidation). My new consolidation loan is current. My scores are 690, 669, 702. Am I automatically disqualified from Conventional financing because the time since my last late is too recent? How about FHA? Thanks! This is a great website.
Tom – if you are applying for a FHA loan, we might be able to help you now. Call us at your convenience 919 649 5058. Glad you got it consolidated!
Eleanor:
Does your company get mortgages for those who live in other states other than NC?
Thank you!
Yes, you can call us at 919 649 5058
My father passed away 11/2013. I was the coborrower of the mortgage. The house went into foreclosure and was sold august 2014. It has been 1 year since the foreclosure. I have lived in agony with this foreclosure ordeal. I would like to purchase my own home. I was told after a year i could purchase a home considering the unexpected circumstances of my father’s death. I live in TN. What do i need to do to get the ball rolling to buy my house? Thanks!
Renee, unfortunately, you have some more time to wait a little while longer before you can buy a house.
Hi. Its past the sept 15 date. My 315k in loans are no longer in deferrment. Im on an IBR plan but pay on $5 a month (bc my income is so low compared to debt). If i show proof of the $5 a month, will the bank consider that my payment, or will they still consider the 2400 a month that it should be?
Brian, it depends on the lender you apply with. We are told that we have to have A PAYMENT on ALL of your loans.
Some lenders, Movement Mortgage for example, is requiring a fully amortized payment on student loan debt.
BIG difference. IF you are in NC – please call us, 919 649 5058
“U.S. student loan debt is about $1.1 trillion dollars and has tripled over the last 10 years. FHA is concerned because monthly payments on student loan debt will nearly double in the future, which WILL effect a borrowers ability to repay the loan. Nobody wants to see another Mortgage Meltdown, and deferred Student Loans are seen as a possible ‘interrupting factor’ that could cause thousands of Americans to begin missing house payments.”
Well, gee, with that philosophy, I guess we’ll all be living under a bridge, because if we can’t afford a mortgage payment, then we certainly won’t be able to afford monthly rent.
We see many situations in NC where a family member is actually making the Student Loan Payments. We are actually doing this for our son.
In the situation where a family member is paying the loan, you will need to prove that this has been going on for at least 2 years. If the payments have been made directly to the Student loan Servicer, then we don’t have to count the payment against you (most of the time). If the family member gives YOU the money, and YOU pay the student loans… well that could be difficult to document, but it’s something we should definitely talk about it!
Hi Eleanor,
I want to see if I am interpreting what your saying above correctly. My husband and I have very large monthly student loan payments and are about two years away from having enough savings to put down to buy a home. Would it be in our best interest to have our parents making our loan payments for us directly to our lenders? Would this potentially improve our DTI ratio and qualify us for a better mortgage? Thanks, Amina
Amina – YES! Have someone else make the payments directly to the Servicer. Remember, in NC you can also apply for the Mortgage Grant Program to make your down payment.
I am searching for an answer to my question, but I can’t seem to find it anywhere on the internet. What if you are a current student and want to buy a home? My husband and I are in our 50’s, both students. We are both professors, but need a doctorate to obtain better career opportunities. Our loans are in deferment since we are still students, yet we were told they would have to use 2% to include in our debt ratio. They suggested we consolidate our loans, but the financial departments do not recommend this until you graduate because that is when the loans come due. Personally, I am a year and half to longer out depending upon how long it takes to finish my dissertation. My husband is further out yet because he will finish his Master’s by July and start a doctoral immediate following. So since we are currently students with loans deferred for that reason, are they still to consider it debt? We are so confused and upset because a lender just told us this today after he said he was going to a soft credit pull and did a hard credit pull instead. Please I would be interested in knowing we are feeling very discouraged right now.
My Uncle and my mom put money in my account to help me pay my loans. Is there a way I can prove this? My Uncle has been helping for years. My mom has just started. Sorry if I’ve asked this question already. Just trying to have all of my ducks in a row. They don’t pay it directly, because at one point it had to be taken out of my account each month. This is making me anxious.
Ashley, if you have 12 months of canceled checks we might be able to use it. If they are actually paying the Student Loan company, that’s even better!