Student Loans May Affect Mortgage Availability

US News & World Report published an informative article about how student loan debt can impact getting a mortgage. It’s common knowledge that students today are graduating with more debt than ever. Paying that debt off can take years and in many cases more than a decade. Students typically will rent for several years until they can save up for a down payment and then buy their first residence.

The article looks at the various types of loans available for mortgages:

FHA Loans

Created in the 1930s, a Federal Housing Administration mortgage is a popular choice for many first-time homebuyers. Not only does it often allow for a lower down payment — 3.5 percent in some cases — the credit criteria can be a little more forgiving than one from a traditional lender.

Unfortunately, recent changes to FHA mortgage underwriting rules may make this option less available to consumers with student loan debt. In the past, consumers who had their student loan payments deferred for at least 12 months could exclude this debt from the overall debt-to-income ratio considered when applying for a mortgage.

What lenders look for here is whether your monthly debts are so high compared with your income that you are likely to struggle or be unable to pay your mortgage payment down the line. Most lenders look for debt-to-income ratios lower than about 43 percent, but some are OK if it is as high as 50 percent.

For borrowers with large student loan debt, having the option to exclude this debt from that debt-to-income calculation could mean the difference between being approved for an FHA mortgage and being denied. Since Sept. 14, however, such deferred loans will now be included in the debt-to-income calculation to the tune of 2 percent of the student loan amount or about $200 for every $10,000 owed.

This includes situations where the borrower is under an income-based repayment plan with a payment of zero dollars. Borrowers with fixed monthly payments will have those payments used in the debt-to-income formula.

While this rule change will certainly cause some first-time applicants to be denied, it will also help ensure that consumers are not taking on more debt than is manageable.

VA Loans

Veterans Administration loans work under similar guidelines; however, they will not count the student loan debt if the loan is in an 18- to 24-month deferment at the time of closing.

Anecdotal evidence seems to indicate that underwriters sometimes use the same standards for both FHA and VA home loans, so it’s always a good idea to ask how a deferred or zero dollar income-based repayment amount will be treated.

USDA Loans

Department of Agriculture home loans will take into account 1 percent of the balance of the loans in cases where the loans are deferred or under an adjustable repayment plan such as income-based repayment. If you are on a standard, nonadjustable payment plan, that is the amount that will be used in the debt-to-income calculation.

Most traditional mortgage writers use Fannie Mae’s underwriting standards. These standards have also recently changed, but for the homebuyer’s benefit. These new standards require that the greater of 1 percent of the student loan balance or the actual payment amount be used when determining applicants’ debt-to-income ratio. Up until recently, the amount used was 2 percent.

In short, you should counsel your students to try to pay off as many of their college costs as possibly while they are in school so they graduate with a minimal amount of debt. Scholarships, grants and summer employment can help them reduce the debt burden they will have at graduation.

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