|Student loans can hurt mortgage applications
For anyone who has tried to apply for a mortgage and had student loans, they know what it’s like to be scrutinized and questioned by the mortgage company over the validity of those obligations.
Like other forms of debt, such as car loans or credit cards, student loans fall into the same classification – debt made against income or an ability to repay. As with all consumer debts, student loans reduce the ability to borrow because they erode income.
Quick life cycle: Student
loan to home loan
• Consumer decides to take out various large student loans in excess of $50,000 (average amount) to pay for college tuition;
• Consumer finishes college in hopes to land an occupation, with the expectation to earn income large enough to afford student loan payments and a housing payment;
• Consumer enters decision to buy a house;
• Consumer speaks with a mortgage lender about purchasing a house;
• Student loans resurface into financial picture, reducing purchasing power;
• Consumer’s expectation of purchase price becomes “subject to change” based upon all liability payments;
• Consumer purchases a house with student loan payments accounted for and makes timely repayments of principal and interest on both mortgage and student loans.
Student loans are reported on a credit report just as any other payment obligation. In many instances, the student loan payments are deferred, extended to a future date when payments kick in if they have not already. Lenders are required by law to account for all material debts known to them in the supporting documentation a borrower provides in obtaining a home loan. Student loans can show a payment at $50 per month on a given obligation all the way up through $100 per month and higher.
It’s not so much the monthly payment per student loan that lenders have to offset, it is function multiple student loans with various lenders, each showing a different payment.
Tallying all the payments together is where things change. For example, a consumer’s credit report might show six separate student loans totaling $40,000 each with a payment at $80 per month. That equates to a $480 per month obligation, which can reduce borrowing power by upwards of $60,000.
Consumers would be well suited to avoid private lenders when obtaining student loans. Private lenders charge significantly higher rates of interest, and shorter-term amortizations can inflate the payments resulting in more forgone power.
• If you have multiple student loans, consolidate them into one loan to reduce total student loan payments (speak to a lender first).
• If student loans are consolidated and they don’t report that way on the credit report, the lender has to use the information they have showing the higher payments because that’s what the credit report reveals unless further supporting documentation can be provided to show each loan has been consolidated into one new debt.
• Avoid any student loan delinquencies, especially in the last 12 months. Ignoring this could result in your application being denied for a government loan. Government programs are strict about delinquencies on federal debt, which is what a student loan is.
• If student loans report as deferred on your credit report, get the specific payment amounts from the servicer or a letter from the servicer stating an approximation of what the payments will be when they come due and payable.
• If a payment letter cannot be obtained, the lender will use 2 percent of the principle balance to determine appropriate payment obligation for qualifying.
• If any student loans are paid off in full, but credit report shows there is a current payment obligation, provide supporting documentation showing that has been paid off in full to the mortgage company.
Credit caveat: If a student loan is in deferment for 12 months or longer, only on an FHA Loan can the payment be omitted from the lender’s qualifying ratios used to determine ability to borrow.
Tidbit on qualifying for a
mortgage out of college
If you are a previous student and have a limited work history and student loans, you can still potentially qualify for a home loan if your field of study was in direct relationship to your employment. For example, you have a degree in accounting and you’ve recently taken a job as an accountant. In such a scenario, if you are previously a full-time student and you are not required to file a federal income tax return, you can still qualify for financing, as you were required to file IRS tax returns.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.