I would guess that 70% or more of first time home buyers we talk to these days have Student Loan Debt. With the economic down turn, it seems to us that many families were forced to “dip” into college savings funds to make the month to month bills paid. Confirming that, over 40 million Americans currently have Student Loan Debt! Because of this, student loan debt payments are now an important part of the calculations, especially Deferred Student Loans.
When we are going through the pre-approval process with first time home buyers, one of our first questions is about deferred student loans and how that debt is supposed to be paid. There are several different ways that deferred student loans are viewed by mortgage underwriters in 2015… and starting this fall, the way we look at IBR and PAYE loans could be changing too!
Deferred Student Loans and Mortgage Loan Approval 2015
“How do Deferred Student Loans Affect My Mortgage Approval?,” is a common question we get from borrowers.
All student loans (Deferred, IBR, PAYE, subsidized or not) will affect mortgage approval, and student loan payments (of course) must be made on time. If you have been behind on your student loans, it’s important to get the payments “re-confirmed,” (basically, you agree to “start over”) and you will need to make at least 6 months of on time payments before applying for a mortgage.
Don’t ignore your student loan debt, remember, you can NOT go bankrupt and “get rid” of Student Loan Debt.
Minimum Credit Scores: Those who ONLY have Student Loan Debt will not have as high a credit score as folks who have Student Loan Debt AND revolving credit accounts too. Most folks are going to have student loan debt for about 20 years – therefore student loan debt is considered an “installment loan.”
Installment loan debt does not boost your credit scores as much as managing revolving credit, which requires you to keep up with changing monthly payments, and keep your balance in check. Generally speaking, you will want to be sure you keep your credit card balance under 30% of the “Credit limit.”
Deferred Student Loans And Your Mortgage Loan Approval in 2015, What You Need To Know!
FHA Home Loans: If you have a deferred student loan, it must be deferred for at least 12 months or the future payment will be taken into account as a bill. For MOST Banks, this really means 13 months – because they are going to count it from the month of the First Payment.
This can be tricky, because most student loan debt can only be deferred for a maximum length of 12 months. If you’ve just started a plan, this means that the future payment is counted into your debt to income ratio and could affect your loan approval or how much you can get approve for. If less than 12 months of deferred student loans show on your credit report, the Underwriters are required to use 5% of the balance.*
We can help walk you through the process of refinancing this debt (which sometimes makes sense with rates so LOW), and / or figuring out how to get the documentation that our underwriters will allow
Effective September 14, 2015 THIS is all changing. ALL Student Loan Debt, regardless of the status… meaning Deferred, etc. will be counted against you. So, if you have $48,000 in Student Loans and they are ALL in deferment until 2018… we will NOT be counting them against you right now. However, starting in September – every one of those loans will be counted in your debt to income ratios as we qualify you to buy a house. We will be required to “show” a payment, or we will count 2 OR 5% of the balance! Yikes!
Here are the FULL FHA Mortgage Guidelines for Deferred Student Loans starting 9/14/15
VA Loan– If 12 month deferment of student loans or more, we don’t have to count the debt. Again, for most Banks this is actually 13 months – because they are going to count it from the month of the First Payment. If less than 12 months of deferred student loans show on your credit file, the Underwriters are required to use 5% of the balance.*
Conventional Loan– Even if your student loan is deferred, the future payment of the loan will be counted in your debt to income ratio. If it’s not documented (meaning we can’t prove what your student loan payment is GOING to be) then it will be counted with a payment at a rate equal to 5% of the balance*, regardless of deferment status.
USDA Home Loans – 1% of the balance will be counted on EACH of your deferred Student Loans*, regardless of deferment status. Read the NEW USDA Home Loan Guidelines regarding deferred student loans with less than 24 months before a payment is due, and how those loans are considered in your debt ratios for buying a house.
*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, with the exception of IBR loans .
Bottom line? When getting a mortgage make sure to know how long your student loans are deferred for and what the future payment will be. KEEP all paperwork, so that we can sort through it with you!
Your monthly living expenses — mortgage, taxes, homeowner’s insurance, student loan debt AND credit card payments, car loans, etc. can’t account for more than 43.0000 percent of your gross income. This is part of a new NATIONAL LAW passed by Congress for mortgage loans earlier this year. Do we get SOME approvals for folks with Debt to Income Ratios higher than this?Yes- but these days those are definitely the exception.
One client we recently talked to had co-signed with 3 children on Student loans. Unfortunately, she is now straddled with has $100,000 worth of student loan debt.
FORTUNATELY, we could get cancelled checks for the past 12 months, showing that her kids were actually making ALL of the payments – in that RARE situation, we did NOT have to count the debt against her. Perhaps your folks are making all of YOUR student loan payments (we did) then we would not have to count the payments that are OUT of deferment, if we can document a history of someone else making the payments!
Here’s a Question we had from a Prospective Borrower with Student Loans:
I have about $30,000 in student loans, but they are still being deferred. Is this considered when I am shopping for a mortgage loan? I will not need to start repaying the loans for over 12 months…Also, what is the best time to go ahead and get pre-approved? Ideally, I would like to buy about 6 months from now.
First, in regards to WHEN you should be talking to a lender, our suggestion is to do it, as soon as you decide you want to buy a house. Pre-approvals last 90 days before you have to start the process over, meaning you have to update your paperwork with us. So, if you want to buy in six months, you should start the process in the next month or two
As we mentioned above, mortgage loan programs allow student loan payments to be excluded from debt ratio calculations if they are deferred for at east 12 months and have the option to renew the deferment (USDA Home Loans are the hardest to work with when it comes to Student Loans – however, there are down payment Grants from the State of NC, that are easier for First Time Home Buyers).
How USDA Home Loan Underwriters (specifically) look at Deferred Student Loans
First off, the USDA Home Loan Underwriting Guidelines are scheduled to “officially” change starting 12/1/2014. The guidelines are getting more strict, and unless you have middle credit scores above 680 – you will have more paperwork required (in most cases) to get your mortgage approved. It’s really a balance between how much your Debt to Income Ratios are and your credit score for USDA Home Loan approval…
This is substantially higher than the 620 and 640 credit scores we’ve been working with for more than 10 years with the USDA Home Loan NC Program. The USDA Home Loan Maps also changed 12/1/2014 and many neighborhoods in NC no longer qualify for the program.
For USDA Home Loans Deferred Student Loans that are not in repayment status must use an estimated payment of 1% of the loan balance, or a verified fixed payment provided by the loan Servicer to document the payment that will be due. (READ: We will need help getting this documentation for the USDA Home Loan Underwriters regarding what TYPE of Student Loan you have in Deferment, AND that it will be paid back in “consistent” monthly payments that don’t change.)
SIDE NOTE*** So Far… FHA Loan guidelines do NOT say that the payment we calculate (starting in September) MUST be a fixed rate payment. The FHA Loan Guidelines just read that we must establish what a payment will be.
USDA Home Loan Guidelines specifically address the fact that Income Based Repayment Student Loan Plan amounts and PAYE plans are not fixed payments and may increase annually. Therefore, if your IBR Student Loan payments are currently $0, we are NOT allowed to use $0 in the debt ratio, because the Student Loan payment is likely to change.
- USDA Home Loan Requirements state that we must consider 1% of the outstanding Student Loan Balance or the FIXED loan payment, as reflected on the Credit Report. Exception (directly from the USDA Loan Guidelines):“Monthly payment amounts listed on the credit report, which are less than one percent of the outstanding balance may be used when evidence from the loan servicers is obtained indicating; 1)the applicant is on a fixed repayment plan not subject to change under the terms of the current agreement and 2) and the monthly payment amount due. Fixed payments have a monthly amount that is not subject to change through the fixed repayment time frame.” This means an underwriter is going to ask us for a letter for each of your student loans. Just know that it’s not us, it’s the guidelines.
- Student Loans that have MORE than 24 months before payments become due will be considered in deferment (as best we can tell) and will NOT be counted against you. (It’s a new guideline, so this could change)
When an applicant provides documentation of an IBR Student Loan agreement and payment from the loan servicers the following guidelines for USDA Home Loans apply:
- If the IBR Student Loan payment is less than $100 and 1% of the total loan balance is more than $100, a minimum payment of $100 must be included in the USDA Home Loan debt ratios. (READ: Even if you are only being charged $22 a month, we are going to COUNT $100 a month for that debt!)
- If the current IBR Student Loan payment is over $100, lenders may use that payment amount in the USDA Home Loan debt ratios.
Additionally, if your Student Loan deferment (no matter what type of mortgage you are applying for) is not greater than a year, you may want to speak with your student loan creditors to see if you can consolidate the loans and extend the period over which you pay them back. We’ve seen many people do this, and it potentially allows you to qualify for a mortgage while still counting the student loans against your debt ratio.
Want to see the specific Requirements for A Home Loan with Student Loan Debt? Let us look at your unique situation, and what the Underwriters will think about your Student Loan Debt and Mortgage Loan Eligibility! Call Steve and Eleanor Thorne 919 649 5058 – find us on Facebook – add us to your Circles on Google + / we want to connect and find out how the housing market looks in YOUR corner of NC!