Mortgage Myth: “College was expensive and, as a result, I have a lot of student loan debt. There’s no way that I’ll be able to buy a home in the near future!”
If you have student loan debt, you’re not alone. In fact, you’re in the good company of over 40 million Americans – with recent graduates averaging around $34,000 in student loan debt. Ouch! If you’re among the folks struggling to figure out if you’ll ever be able to afford to buy a home, don’t despair. You have options.
The financial landscape is changing for many borrowers with student loan debt. In July of 2017, Fannie Mae updated underwriting rules to make it easier for some people with student loan debt to qualify for a home loan. The new rule impacts borrowers who have federal student loan debt and are on an income-driven repayment program. Income-based repayment plans mean that your monthly student loan payment is determined by your income and family size and will fluctuate accordingly.
When applying for a home loan, a lender always looks at your debt-to-income ratio (DTI). This is when student loan debt becomes a big part of the equation. However, if you’re on an income-driven repayment plan, the debt burden is now calculated a bit differently with Fannie Mae loans. Lenders used to use 1% of the student loan balance for calculating a borrower’s DTI (instead of the actual payment amount). That meant that borrowers on an income-driven repayment plan would often have a higher DTI.
The reduced monthly payment can now be used in the DTI calculation. From Fannie Mae: “If the lender obtains documentation to evidence the actual monthly payment is $0, the lender may qualify the borrower with the $0 payment as long as the $0 payment is associated with an income-driven repayment plan.” This new guideline opens up new doors and makes it much easier for borrowers with income-driven repayment plans to qualify for home loans.
Other Deciding Factors
Unfortunately, the new rules from Fannie Mae won’t help you out if you have private student loans and there are many other factors that lenders will look at to help determine what kind of loan you’ll be qualified for. The most important thing to remember is that student loan debt cannot altogether prevent you from getting a mortgage.
Some of the key factors that will impact your qualification are:
- Front- & Back-End DTI Ratios
Simply put, both the front-end and back-end DTI are comprised of your debts and your earnings. Both the front- and back-ends are factored against each other to calculate a percentage. If your DTI is too high, it could impact your ability to qualify for a home loan.
- Down Payment
Have a sizable amount of cash reserved for a down payment? Great! This will help and it will certainly impact your front-end ratio. If you’ve saved up for a down payment, your student loan debt may not effect your mortgage qualification as much. Even if you have not saved a sizable down payment, consider looking into an FHA home loan that allows for a low down payment and is a great option for first-time home buyers.
- Income & Job History
Having a solid income and steady job history improves your chances of being approved for a home loan. Even if you have a lot of student loan debt, proving that your income is high and you’re able to hold down a job for two years or more is worth a lot of points in the lending industry.
- Credit History
Are you able to pay your bills on time every month? Does your credit score reflect a responsible bill payer? You’re on the right track. To learn more about how credit scores impact your qualification, Click Here.
The best way to determine whether or not you’re ready to buy a home is to sit down with a trusted financial adviser or one of our experienced mortgage bankers at Summit Mortgage Corporation. If you’re unsure of when and if you’ll be able to start the home buying process, we’re here to help explain all of your options.
Even if today is not the right time for you to buy a home, we can help you determine the steps it will take to get you on the right track. Give us a call today!