Student Loan Debt and Mortgage Challenges

By Jesse Gonzalez, President, North Bay Capital

Student loan debt and mortgages, how does one affect the other?  According to USA Today  the national student loan debt was $1.2 Trillion in April of 2015.  How does that make you feel?  Let’s face it, our parents are great, but we don’t want to live with them forever.  There’s something about striking out on your own, starting your own life, and building wealth.  One way to build personal wealth is to own real estate.  Unfortunately, underwriting standards have tightened up from the good old days of no income/no asset mortgages.  You know about those, they’re the loans that caused your parents to lose their house.  How do I get a mortgage if I have student loan debt?

Debt to income ratios play a very important part of qualifying for a mortgage.  Lenders want to see that your monthly debt, as a percentage of your monthly income, does not exceed 45%.  This includes the principle/interest/property taxes/and monthly insurance due on your newly acquired home loan.  So, if you make $1,000/mo. you’re only allowed to have $450/mo. in monthly debt, including the mortgage expense.  These are debts that show on your credit report, meaning the lender won’t count your cell phone bill against you, only credit card/car payments/child support/alimony/ and student loans will count against you.  Many young people carry a large student loan bill, whether it be in a deferred status, or currently in the repayment period.  The article I link to above states, ” Of all of the open student loan accounts, says Experian, 39% ($417 billion) are in deferment (the period during which payments are not obligatory) and 61% ($727 billion) are in repayment. Of the consumers who are currently in the repayment stage, their average payment is $279 per consumer.”

How do lenders view student loan debt when counting it towards your monthly debt load?  Thankfully the Fannie Mae lending guide gives us a way to figure this out.

The lender must use the greater of the following to determine the monthly payment to be used as the borrower’s recurring monthly debt obligation:

  • 1% of the outstanding balance; or
  • the actual documented payment (documented in the credit report, in documentation obtained from the student loan lender, or in documentation supplied by the borrower).

If the payment currently being made cannot be documented or verified, 1% of the outstanding balance must be used.   There is an exception to this rule, if the actual payment is less than 1% of the outstanding balance and it will be amortizing with no adjustments to the payment then the lender may use the lower and fully amortizing monthly payment to qualify the borrower.

That’s it, pretty easy and straightforward, and it is very important to know that just because you’re in the deferral period of repayment you’ll still have to account for some type of monthly expense associated with your student loan.

Jesse Gonzalez, President