The Discouragement Of A Mortgage With Student Loans
By: Ian Golightly
Suppose you’ve graduated from college or going to graduate from college soon. In that case, you may feel a little worried about your future living plans—commonly, many rent before they decide to buy for various reasons. However, there are a few that choose to buy their first place right out of college. Either or, if you have student debt, it’s understandable with your concerns since high student loan debt can impact if you qualify for a mortgage to buy your dream place.
Many factors determine the eligibility for a mortgage, and even though student loans can impact the home-buying process, it doesn’t need to be in the way of getting the home you want. Here are some things you should know:
Qualifying For A Mortgage With College Debt:
First and foremost, if you know that you can afford to make the monthly down payments for your home and with any other debts, you need to find a lender that can you meet you in the middle and agree. Lenders will usually analyze your debt to income ratio before approving a mortgage because it is a tool that lenders use to determine whether you have the financial means to afford the loan. DTI is another term that can be used for debt to income.
DTI has two parts – The front end and back end.
Another term for front-end DTI is also known as the housing ratio. The ratio can be calculated by dividing the projected monthly mortgage payment by your gross monthly pre-tax income. The projected monthly mortgage should include the costs of taxes, principal, insurance payments, and interest payments, collectively called PITI.
The lending company that you choose will determine the terms for conventional loans. Because all lenders are different, you should expect a ballpark limit of approximately 28% for the front-end ratio. As of 2019, the Federal Housing Administration (FHA) allows a maximum front-end ratio of 31%
The back-end ratio accounts for all of your debt in comparison to your income. Most lenders will calculate this ratio by adding your monthly debt payments to housing expenses and then dividing by gross monthly income.
As well as the PITI on your mortgage, these debt payments also include credit card payments, child support, and even student loans.
So How Student Loans Affect Mortgage Process?:
Historically, student loans by themselves can not prevent you from getting a mortgage. Student loans on your debt to income ratio is a crucial deciding factor. When you see your local lender, they will look at your front and back-end debt to income ratio, credit history, assets, income and work history, and how large of a down payment you can have available.
If by chance, you have high monthly student loan payments but no other debts, decent income, and you’re looking for a decent price home, you have a great chance that you’ll find it when you apply for a mortgage loan. On the other hand, those debts push you past the lender’s debt to income threshold, then most likely, your student loans may prevent you from qualifying for a mortgage loan.
Other Factors To Consider:
Lenders also consider other factors besides front-end and back-end ratios when considering you for a mortgage loan. Here are some important ones:
1.Credit Score and Debt:
Lenders may allow you to hold a band-end ratio as high as 50% if you have excellent credit. This situation is uncommon, but it is not impossible. If you have other loans with small balances, it will benefit you to wipe out some of those loan balances to bring your DTI score to a better place. Also, your credit scores matter too when applying for a mortgage. For most lenders, your FICO score should be at least 620 for conventional loans and 500 for FHA loans. You should call and discuss these things with your local lender.
2.Down Payment Size:
If you can save 20% or more down payment, your student loans are far less likely to affect your loan process. The size of your down payment affects your front-end ratio, and there’s a correlation the more you borrow, the higher is your PITI.
3.Your Income And Job History:
The amount of income you bring in each month is crucial in determining your acceptance for a mortgage loan. Financial institutions use the concept of debt-to-income ratio (front-end and back-end ratio method) as a risk management strategy.
Just because you have debts, you may also have a high income. It’s easy to focus on debts, but if you boost your earnings by getting a raise or negotiating your earnings, you’ll also improve your debt-to-income ratio. Another thing to keep in mind is that student loans may not affect your ability to get a mortgage, but your job history may hinder your chances of securing a loan.
Some lenders will not accept income numbers unless you have the bare minimum of two years of employment history. Some lenders make sure you have been in the same field for at least two years. If you just got out of school, it may be a challenge to secure a mortgage, but it’s not impossible.
Plan For Action: Lowering School Debt and Waiting
If your education debt is resulting in your debt-to-income ratio too high, you have the option to pay off your student loans faster. There’s no penalty for making early payments to drive your debt down. The quickest solution is to find room in your budget to reduce spending and increase savings or earn extra income. A small modification in your daily lifestyle can free up some of your monthly income. Another solution is to find a part-time job or start a side hustle for extra cash.
Yes, it’s understandable to feel burdensome to lending rules, but they are there to protect you from taking on debt that you can’t afford to pay back. You may spend a few years getting your student loans lower or other outstanding debts paid down, but it could allow you to qualify for a lower interest rate or higher mortgage amount. Once you obtain a better credit score and have a more extended employment history, you may be given more options when you’re ready to be a homeowner.
Refinancing Student Loans Another Option:
If you understand the process, refinancing with a private lender may be a possible strategy for driving down your debt, which will result in a decrease in your debt-to-income ratio.
So, will your student loans affect your ability to secure a mortgage loan? Yes, it can, but it doesn’t mean there are no solutions out there to qualify for one.
As discussed, refinancing student loans, improve credit score, renting for a few years, and lowering the DTI ratio are just a few ways to improve your chances of qualifying for a mortgage.
If you want to see if you’re qualified and you’re ready to purchase a home, you can start the process and find out in roughly 7 minutes! (Click Here)
Disclaimer: The context of this article is expressed as opinions by the author.