Mortgage Qualification and Student Loans UPDATE

By
Mortgage and Lending with Equity Resources NMLS 67179 Licensed in NC

Deferred Student Loans FHA Mortgage Since the Great Recession, we’re talking to people with more than $70,000 in Student Loan Debt several times a week.  For the most part, these are NOT lawyers or doctors, or folks who are otherwise being paid in excess of $70,000 a year.  

No, these are folks who have this student loan debt in a deferred status, and generally, don’t have to make payments on their student loans.  FHA Mortgage Qualifications and Student Loans in deferment will be more difficult starting in September of 2015.

This is a HUGE change!

I talked to a lady this week who has $38,000 in deferred Student Loans.  She wants to buy a house later this summer.  We started looking at what her Student Loan payments are going to be – and they total $388 a month.  Well, she also has a car payment of $247 a month and two credit card bills that total a minimum payment of $75 a month.

She’s a Teacher, and makes right at $33,000 a year.  She also works part-time cleaning vacation homes, and she makes another $10,000 a year working these extra hours. She doesn’t CURRENTLY have to make any payments on the $38,000 in deferred Student Loans… because they are in an IBR repayment schedule.

If she could buy TODAY, and we could get evidence that those loans are in deferment for at least 12 months from the date of closing – we would not have to count the almost $400 a month. However, with the newest FHA Mortgage Qualification and Student Loans update – we WILL have to count those payments when qualifying her to buy a house starting September 14, 2015.

I’m repeating myself here – but this is a HUGE change in FHA Mortgage Qualifying… and other programs are following the same path.

U.S. student loan debt is about $1.1 trillion dollars and has tripled over the last 10 years.  FHA is concerned because monthly payments on student loan debt will nearly double in the future, which WILL effect a borrowers ability to repay the loan.  Nobody wants to see another Mortgage Meltdown, and deferred Student Loans are seen as a possible ‘interrupting factor’ that could cause thousands of Americans to begin missing house payments.

FHA Mortgage Qualification and Student Loans

Using the lady I spoke to in Hatteras as an example… FHA Mortgage Qualification and Student loans now say count the loan payments in the qualifying ratios, even if you are not currently required to make a payment .  This is going to make it impossible for MANY first time home buyers to qualify for a mortgage with their Student Loans.

Let’s take a minute and look at this from the FHA Underwriter’s perspective…  if you have $100,000 in Student Loans, and we have to count payments on $100,000 worth of student loan payments against you to qualify to borrow an ADDITIONAL $250,000 for a house… well you are probably not going to qualify.

With this new FHA Mortgage Qualification guideline, Student loan debt is being treated just like any other liability.

You can’t Bankrupt out of Student Loans.  They don’t go awaythey MUST be paid, just like Taxes.  Student Loans are reported (even in their deferred or “forbearance” state) to the credit bureaus.  As we now count the monthly Student Loan repayments in FHA Mortgage Qualifications, the monthly student loan payments impacts your debt-to-income qualification ratio and reduces the loan amount borrowers can qualify for.

This SINGLE FHA Guideline will change the First Time Home Buyer “Surge” of buyers in North Carolina, and could easily cause a slow down in this Seller’s Real Estate Market.

Home Buyers with student loan debt who can NOT prove how much their payments will be once they are out of deferment, will be charged 2% of the balance as a payment.  AGAIN, with the maximum debt to income ratios from the Automated Underwriting Systems set between 43% and 45% for some mortgage programs – this will LOWER (significantly) the mortgage loan borrowers will qualify for.

How Much Will Student Loan Payments Reduce Mortgage Qualification?

Of course, we are seeing mortgage rates that are in a VERY low 3 – 4% range.  So this helps with mortgage qualification power.  However, even with low mortgage rates, First Time Home Buyers (and others) with $50,000 in student loan debt payments can reduce a buyers purchasing power by up to $80,000! Or think of it this way, every $250 a month in student loan payments reduces a buyers purchasing power by about $40,000!

There’s a “Silver Lining” for first time home buyers applying for a FHA mortgage loan who can make a 3.5% down payment.  The borrowers, who can make a down payment, and who have student loan payments – can still use FHA mortgages to buy a house.  FHA Mortgage Qualifications allow home buyers to go up to 50%-55% DTI ratio.

If you are applying for a FHA Mortgage Loan, and you NEED a Mortgage Grant for the down payment – then the maximum debt to income allowed is 45.00000000%

Clarifying this again…  with CURRENT FHA mortgage guidelines, we do NOT have to count student loan payments that we can prove have been deferred for more than 12 months.

Your Spouse’s Student Loans May Get Your Home Loan Denied?  Yep.  Many first time home buyers are shocked at how much their spouse owes in Student Loans.  There are no payments being made, so no one really paid attention to the balance.  If the income of someone is going to be used, we now are required to look at those Student Loans in mortgage qualifications… even if they are deferred, even if they are a co-borrower on the loan.

On USDA Home Loans, we do not have to count Student Loan payments that have been deferred for more than 24 months.  We’ve only seen payments deferred for this length when a borrower was able to PREPAY their Student Loans.  Not all Student Loan Servicer’s allow pre-payment for deferred student loans – but some do.  Occasionally, Student Loans can be consolidated, to reduce your overall monthly payments.

Deferred Student Loans And Credit Scores

Student loans are being reported to the credit bureau. If you have no payments, then they are reporting every month, with no payment amount.  These deferred student loans are constantly getting larger as fees and interest are being added to them. Once payments begin, then of course, the payment history is reported.

Student Loans will hurt your credit scores.  The credit scoring formulas will penalize you because you owe more than you initially borrowed…..this is the same as if you are exceeding your credit limit on a revolving credit card….it’s a signal that a borrower is in financial distress.  If needing higher credit scores, you may want to consider paying down the student loan balance so that it doesn’t exceed the loan limit.  

How To Qualify For A Mortgage With Student Loans

We see many situations in NC where a family member is actually making the Student Loan Payments.  We are actually doing this for our son.

In the situation where a family member is paying the loan, you will need to prove that this has been going on for at least 2 years.  If the payments have been made directly to the Student loan Servicer, then we don’t have to count the payment against you (most of the time).  If the family member gives YOU the money, and YOU pay the student loans… well that could be difficult to document, but it’s something we should definitely talk about it!

Would it be more beneficial for you to pay off or pay down your student loan debt or save up for a larger down payment?  That will depend on your unique situation.  Call us, and we can help you create a first time home buyer purchasing plan that works for you. 

You might be able to qualify for the house you are dreaming of by adding a family member to the mortgage.  Fortunately, FHA does allow for a non-occupying co-borrower.  These situations mean that we take all of your income, all of your debts and add all of the other person’s income and all of their debts – and come up with a total qualification.

We think this will be very important in situations where (perhaps) only one spouse has a large amount of student debt.  Perhaps the other person can qualify for the mortgage with the help of a family member.

In most of these types of situations, you will NOT qualify for the Mortgage Grant or First Time Home Buyer Tax Credit programs, but this could be the best option for buying a house, if the student loan payments are kicking you out of qualifying.

READ:  You will need 3.5% for a down payment if you are adding a non-occupying co-borrower to qualify.

Across the “Internet” you might be reading something that says if your IBR payment can be established, we can use 1% of the Balance or $100 payment for USDA Loans. That is outdated information.  We can not use “variable” payment student loan payments.  We MUST establish a payment for you to get a USDA Home Loan

We’ve also put together a guide for Recent College Graduates Looking for Their First Home.

 

You followed the plan.  You went to college, you got a job, and now you are ready to buy a home.  That’s the American Dream.  We understand that.  These new FHA Mortgage Qualifications and Student Loans requirements are making that more difficult – but that doesn’t mean it’s impossible!   NC First Time Home Buyer Programs can help you do this!  Buying your First Home in NC is FUN! If you have more questions about Deferred Student Loans and qualifying for a mortgage… Call Steve and Eleanor Thorne, 919-649-5058  Or leave us a comment below – we try to answer all of your questions!  :)  We offer the Best Mortgage Rates in Raleigh, Connect with us on Google Plus and Facebook :)

Originally Posted at NCFHAExpert

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Mike Jones
SUNSTREET MORTGAGE, LLC (BK-0907366, NMLS 145171) - Tucson, AZ
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Eleanor,

Just wanted to say "thank you" for your excellent articles & blog!  Thank you for the referral of Erin T. & her fiance.  In their initial contact, they emailed "I have considerable student debt and am currently on an income-based repayment (IBR) plan). My fiance got your information from a forum on buying a house with student debt, and we were wondering..."

I asked who referred me, and received this response: "My fiance tells me he got your information from Eleanor Thorne from ncfhaexpert.com. We look forward to meeting with you."

THANKS, Eleanor!

Mike

Apr 05, 2017 11:54 AM #1
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