STUDENT LOAN DEBT AND BUYING A HOME
Compared to past generations Millennials are the most college educated. Many grew up with an understanding they would go to college and a belief going to college would enhance earnings. What many did not realize is the burden that student loan debt would exact as a result. That debt burden has the potential of causing some real problems when it comes to qualifying for a home mortgage.
Student loan debt is reported to be 1.5 trillion, a number greater than credit card debt or car loan debt. How does this debt affect the ability to buy a home, especially with a large amount of student loan debt?
Understanding how student loan debt can affect the ability to get a home mortgage is important to be being prepared for the mortgage process. One would perhaps logically conclude if student loans are in deferment or if a lower payment has been negotiated then that would be the debt burden. However, this is not the case. Those entities who write the guidelines for underwriting their loans are the ones who determine how debt is to be treated.
Underwriting guidelines shift from time to time. I can recall a time when if the student loans were deferred for 12 months no projected payments were calculated in a debt ratio; we used zero for the monthly payment. And I recall a point where it was as high as using 2% of the total amount owed as a monthly debt. Quite a few monthly student loan payments are based on income and how that is handled has varied over time as well.
HOW STUDENT LOAN DEBT IS HANDLED VARIES BY MORTGAGE LOAN PRODUCTS.
If one is considering buying a home while having substantial student loan debt it is wise to determine what loan program is best so an accurate determination of how the debt will affect the purchase can be determined. Keep in mind programs change constantly so always, always be certain to speak with a loan officer who is up to date on guidelines to avoid pitfalls.
Some of the common creditors of student loans are: Department of Education, Navient, and Fed Loan Servicing.
In calculating student loan debt we are dealing with credit reports that, (a) show no monthly payment due because of a loan being deferred or in forbearance, or (b) it shows a payment that is calculated on income which may not be fully amortizing, or (c) it may be fully amortizing. A loan originator must determine the accuracy of the payment when qualifying a home buyer.
How student loan debt is calculated varies depending upon whether the loan is Fannie Mae, Freddie Mac, FHA, USDA, or VA. Some loan programs may use zero as the monthly student loan debt payment if the payment is deferred or if the credit report shows no payment is due. This option is very limited in the scope of what loan programs will utilize this approach. When a payment shows up as zero on a credit report depending upon the loan program the underwriter may calculate from .5% to 1% of the total loan amount as monthly debt depending upon the loan product.
Even if a debtor has negotiated an income based payment that is very low it does not mean this is the payment the underwriter will use. Some loan programs will require the use up to 1% of the total loan amount. Some guidelines require the underwriter use the greater of an amount shown on the credit report whether it is income based or not or 1% of the total loan amount. One percent is the most I'm seeing levied currently. Some loan programs have different rules for student loans that may be forgiven.
So different loan programs have different guidelines. Not every lender has every loan program and not every property or buyer qualifies for a loan program (USDA, VA). It is very important to explore the best options available in any case; with student loan debt it may be even more important. The forgoing are some basic guidelines and are subject to change without notice. As I mentioned earlier I've seen a lot of fluctuation in how student loans are handled. If you have student loan debt and a home purchase in your future it is not too early to begin investigating how the student loan debt will affect your ability to buy a home.