Student loans have been in the news quite a bit recently. As tuition costs rise, college graduates face larger student loan balances than ever before. As a result, student loans often make up a sizable chunk of a college graduate's total debt picture as they enter the workforce and begin to look for housing. Mortgage lenders calculate a Debt to Income (DTI) ratio on every new mortgage application. Here we will look at how the status of student loan payments can affect this DTI on a mortgage application.
First and foremost, because the payments of student loans are reported to the credit bureau it is important to make the payments on time to maintain a high credit score and qualify for the lowest mortgage rates. I know this is obvious but let's at least make sure it gets said.
How student loan debts are analyzed and calculated in regards to a mortgage application is a little less obvious and that is what we will discuss here. To understand how student loans are analyzed, let's first understand how they differ from many other types of debts when it comes to repayment.
A key difference between student loan debt and other debts is that student loans essentially never go away until they are paid in full. They can not be included in a Bankruptcy and will not go away via judgment or collection. Failure to pay student loan debts can result in garnishment of a paycheck, garnishment of Social Security benefits, seizure of any potential IRS tax refund and a tarnished credit rating.
If payments are difficult to make, it is important to make arrangements with your student loan servicer to explore the possibility of additional deferment time or forbearance. These options can provide temporary relief from payments but can add additional interest to the final loan balance. The servicer may allow you to stop making payments but the interest on the student loans continues to accrue.
So How Will Deferred Student Loans Affect My Mortgage Application?
Mortgages are long term debts and deferments are short term solutions, so at some point, the deferment will expire while the mortgage will still be in place. Therefore student loans, even while in deferment, may be included in a borrower's total monthly debts when qualifying for a new mortgage. Whether they are included or not depends on the type of mortgage and the length of deferment. Conventional and USDA mortgages will always include some payment in the qualifying debt ratios. FHA and VA will not count a deferred payment in the qualifying debt ratios in some cases.
Below are the guidelines for student loans for each of the most common mortgage programs......
Conventional (Fannie Mae/Freddie Mac) and USDA (Rural Development)
Deferred student loans are always included.
If the credit report does not assign a payment to a deferred student loan, a copy of the deferment agreement must be provided. The deferment agreement will typically indicate the monthly payment due when the deferment expires. If the deferment agreement does not indicate the future payment, then the lender will use 2% of the outstanding balance as a monthly payment calculation. For instance, if no payment has been assigned to a $10,000 student loan balance, $200 will be used as a monthly payment.
FHA and VA
Deferred student loans are not always included.
FHA and VA have bit more leniency when it comes to deferred student loan payments. They do not automatically assign a payment to a deferred student loan debt. Here are the specific FHA and VA rules as to whether these deferred debts will be included or not...
- If the student loans are deferred but the deferment ends within 12 months of the new mortgage closing date, a payment WILL be included
- If the student loans are deferred and the deferment period will continue for at least 12 months past the new mortgage closing date, a payment WILL NOT be included
- A copy of the deferment agreement will need to be provided to the lender to determine the exact deferment terms.
For further information about how student loans affect the mortgage qualifying process, feel free to contact me below...