Mortgage and Student Loan Debt

THIS IS ALL CHANGING June 15, 2015

Questions from Home Buyers often start with qualifying for a Mortgage and Student Loans.  A study this summer shows that a record 1 in 5 households have Student Loan Debt right now.  Often times, folks don’t know what the payments on their Deferred Student Loans will be.

Those payments will affect their qualifying power, because we are required to calculate a Debt to Income Ratio – but if you don’t know what the payment is going to be yet, how do you figure out what you can afford? How do WE know what you qualify for?

Mortgage and Student Loan Deferment

If you have Student Loans that are in Deferment, we are going to ask you for a letter showing that the Deferment is going to last for the next 12 months. This is a catch 22 process. 

Let’s say you start looking for a home in September, and you get pre-qualified for a mortgage.  During that pre-qualification, you tell us that your have student loan payments of $79 a month, with the rest of the Student Loans in Deferment.  99.9% of the folks we talk to ONLY have Deferment for 12 months.  At the end of that term, you show documentation, and get the loan deferred for another 12 months.

If you applied for your current Student Loan Deferment in July, and you are getting pre-qualified in September, you don’t have 12 months left on your current Student Loan Deferment.

Because of that, we suggest that we get the student loans “re-deferred” at the time we are within 20 days of closing.  This is tricky, but if we know you are under contract, and you are getting a FHA home loan (or VA home loan or Conventional) which will close at the end of October – then we are going to suggest that you get the loan re-deferred sometime during the first week of October, and send us the letter then.

If you get the letter in September, and you close in October, you only have 11 months left.  I’m hoping this makes sense – just take away the fact that there’s some paperwork we are going to need to juggle – and we’ll help you with it.

Qualifying for a USDA Home Loan with Student Loans

USDA Home Loans are no down payment loans, so the underwriting guidelines and qualifying is a little tougher.  There’s more risk for the Bank since you don’t have to make a down payment.  If you are applying for a USDA Home Loan they are going to count Deferred Student Loans against you, even if they are currently in Deferment.  This is NOT a Bank underwriting guideline – this is a USDA Home Loan NC Underwriting Guideline.

We will need a letter, in this case, telling us what your Student Loan payment will be once it is out of Deferment, or the USDA Underwriters will require us to count $100 a month PER Student loan.  Again, this is paperwork we help folks with every month.

USDA does not actually make home loans, they only insure the Bank against you going into foreclosure.  These loans are available to folks who are willing to live in a little more “rural” part of the County you want to buy a house in.  USDA Underwriters actually underwrite each loan, so with a USDA Home Loan NC, you will have an “automated approval” called GUS, then our Bank Underwriter looks at the paperwork, then it goes to USDA for their Underwriter to approve it.

The USDA Eligibility Area Maps, meaning the actual places in NC where there are homes that qualify for this program, are scheduled to change.  Before all of the Government shutdown mess in the Fall of 2013, the maps were scheduled to change on October 1.  It will likely get moved back – perhaps to the middle of 2015.  The point being, if you are interested in a USDA Home Loan in NC, you will need to double check which areas qualify for the program.

We also talk to many folks who want to know if you can roll your Student Loan Debt into your mortgage payment.

Rolling Your Student Loan Into Your Mortgage

If you are purchasing your first home, and you want to borrow the money for your home, and then essentially “add on” the balance of your student loans, I guess what I would say is – nice idea – but not happening… at least not in North Carolina.  In NC, we are loaning you money for the property.  We will not be able to loan you money, without equity, to pay off your student loans. 

After you own a home, and HAVE equity built up – you might be able to refinance, and roll those charges in.  If your Student Loan debt is tied to an adjustable rate then your payments will change every six months or so.  It will depend on the terms of your student loan payment.   Many of the folks we talk to want to see if they should take cash out of their home to pay off their student loans, and have one fixed rate payment.

This might make sense for some, especially if you are a NC Teacher, for instance, and have low fixed income (we apologize, by the way – we do NOT pay teachers in NC NEARLY what they deserve in our opinion) – rolling a Student Loan into your home by giving up some of your equity, could be a good budget option.  There’s a HUGE downside, that we must mention.

First, you are giving up equity.  Secondly, you are stretching your student loan out for the life of the loan.  If you are doing this, and you can afford a 15 year loan payment – then again, it might make sense. If you are doing this to help with monthly budgets and cash flow as you stretch those payments out over 30 years – well, you are going to pay MORE in interest over time.  Granted, the way the laws are now, you might qualify to write off that interest.  If you have that equity, and you want to see what your payments would be if you consolidate your payments – just call us, we can help you with that in about 15 minutes 919 649 5058.

Qualifying For A Mortgage with Student Loan Debt

Here’s how we qualify you for a mortgage.  First we look at your Gross Monthly Income (before taxes) divided by your TOTAL monthly housing payment. This is where the cost of taxes, PMI and Home Owner Associations can “cut” into your qualifying. If you are looking for a home in an area that has $200 to $350 in monthly Home Owner Association fees – be CERTAIN you mention that to us when we talk about how much you qualify for.

Once we establish your housing ratio, then we look at your “total” debt ratio. This does NOT include health insurance, phone bills or child care expenses (unless you are applying for a VA Home Loan, in which case they are considered).  The total debt ratios are going to get a bit tighter, as we approach January of 2014 because of a new set of mortgage “laws” that include Qualified Mortgages.  This new legislation, assuming it goes into effect, will cap some total Debt to Income Ratios at 43.00000% .  The way we calculate that ratio, including the Student loan payments we’ve discussed is as follows:

Past due on Student Loans?  Unfortunately, if you are in default on Student Loans you will not get approved for a mortgage.  Because of this, we suggest that you call the Student Loan folks, and set up another payment plan.  Make at least 6 payments on time – and then you can probably qualify for a mortgage with Student Loans.  Call us, we can help you walk through this process.

If you are one of the millions of folks who is married to someone with tens of thousands of dollars in Student Loans, and you are concerned you might not qualify for a home with that debt, let’s talk about adding a non-occupying co-borrower to the loan.

Have specific questions about qualifying for a mortgage with Student Loans?  Leave us a comment below, or call Steve and Eleanor Thorne 919 649 5058 for more information and to get pre-qualified. Not all Banks offer ALL of the NC First Time Home Buyer Programs – we do.  Connect with us on G+ or Facebook!  @SteveThorneNC and @isellmoney