Paying Student Loan Debt Down To Qualify

I know I’ve written several pages about Student Loan Debt, and trying to get a mortgage – I promise, I’ll move on next week to something else.

BUT we JUST HAD THIS HAPPEN:

Borrower has 670 credit scores, great job, some student loan payments that he’s made on time every month. He’s never missed a payment on anything.

He has only a little cash for down payment, so we were sending him through the NCHFA Mortgage Grant program.

EASILY QUALIFIED to buy a $185,000 house.

The Automated Underwriting System rejected him.

The reason stated on the findings indicated he owed more on his Student Loans now – than when he initially applied.  

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.  

The Automated Underwriting system (AUS) is now ONLY “registering” that you owe more than you initially borrowed on an Installment Debt.  If this “tweak” in the AUS that went into place on April 1, 2015 stays in play – then Student Loans will not ONLY hurt in qualifying for First Time Home Buyers because we have to count the monthly payment… they will hurt First Time Home Buyers who are now being required to pay that debt DOWN to the original amount they borrowed to qualify.

We are assuming the answer here is to refinance the student loan debt, right before applying for a mortgage, so that we see the “new” refinanced loan amount and balance.

THIS IS ANOTHER REASON we think that the “hype” that the Millennial Home Buyer is going to push real estate sales higher is perhaps “over stated.” 

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.

Most mortgage programs require us to calculate a “front-end” ratio, which compares your total monthly housing expense — including your mortgage payment, property tax and homeowner insurance premium, homeowner association dues — to your monthly gross income.  In general, the Underwriting engines want to see this ratio no higher than 31%.  If you have VERY FEW other debts, we’ve definitely seen this number be higher.

Then we are required to look at the back-end DTI, which includes your housing expenses (front end number) and includes your student loan debt, credit card payments, car loans and other debts with your gross monthly income.  Although there are ratio waiver opportunities, for USDA Home Loans, we are currently held to a pretty “hard” ratio of 45.000000% for loan approval.  With FHA Home Loans, we can normally go quite a bit higher.

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 that you guys might not qualify for a home with that debt, let’s talk about adding a non-occupying co-borrower to the loan.

Student Loan Debt Mortgage Options

One of the things we are now talking with folks who are trying to buy a house with Student Loan debt about is getting their family involved.   Using a Co-Signor is an option with FHA and Conventional Loans.   But it really only works if INCOME is the issue, not credit, then you CAN co-sign for a loan with a child.  This is really great home loan program for single parents, who need some interim help!  It’s also a great program for Graduate students who can’t imagine studying AND living in a College Apartment one more year!

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

The FHA Non-Occupying Co-Borrower program allows for a minimum down payment of 3.5% – but again, the person who is going to live in the house needs a minimum credit score of 620.

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 into your mortgage loan – just call us, we can help you with that in about 15 minutes 919 649 5058.

Mortgage approval with student loans in 2015 can be like working a really really hard Sudoku puzzle – it takes someone who REALLY knows First Time Home Buyer programs to help you get the numbers to work.  That’s where we come in – we deal with SOOO many folks who have various types of deferred student loans, we know what WILL work, and what won’t.  Call Steve and Eleanor Thorne 919 649 5058 and get Pre-Qualified today!