The Many "Species" of Student Loans
& How They Can Affect Your Home Buying
Did you know that it is now thought that there are almost 18,000 bird species to be found across the world?
A recent study released by the American Museum of Natural History revealed a new accounting ... one that almost doubled the number previously known and detailed by researchers. This new larger number came as a surprise, as scientists have studied birds intently and been "birding" for a long time.
The new study also revealed that long-held beliefs and methods of scientific bird species classification were antiquated or wrong. Scientists now believe there is a "hidden" diversity in bird species. That birds can look similar and actually breed together, but actually be from different species altogether.
Fascinating stuff, right? But what does it have to do with Student Loans? And how does it affect homebuyers?
Well, just as there are different species of birds ... there are different "species" of Student Loans.
The 3 major classifications (or "species") of Student Loans are:
- Federal Student Loans
- Private Student Loans
- Refinance Student Loans
... but variations and rules and regulations for each classification of loans can vary greatly.
And not only is there subtle variations in Student Loans themselves, but their repayment plans, program details, and the impact they take on Mortgage Loan Applicants can also be drastically different. Those differences can prove challenging ... not only when trying to understand them ... but when considering their use and their short and long term ramification to payments and finances.
Why is that the case?
For starters, not all creditors report Student Loans in the same manner to the 3 major Credit Bureaus (TransUnion, Experian, and Equifax). And not all loan programs or guarantors of mortgage loans view Student Loan debt in the same fashion.
As shared above, Student Loans fall into 3 categories, but typically it is Federal and Private Student Loans that are most utilized. I'm focusing here on those that are Federal Student Loans, as they provide the widest menu of options available to current and future Mortgage Borrowers holding student loan debt.
But first, it's important to know:
- Federal Student Loans are administered by the Federal Government.
- Federal Student Loans are the most frequently used form of Student Loan.
There are 3 main types of Federal Loans (Department of Education). Those are:
- Direct Subsidized - (Sometimes called Subsidized Stafford Loans) These loans help undergraduate students exhibiting financial need. Interest is not typically charged on the loan during certain periods, such as when the student is at school (at least 50% of the time).
- Direct Unsubsidized - Available to both undergraduate, graduate, and professional degree students. There is no need to prove financial need associated with this type of loan. Interest is charged during all periods.
- Direct PLUS - Direct PLUS Loans have a fixed interest rate and are not subsidized. That means that interest charges accrue during the time the student is enrolled in school.
Direct PLUS Loans come in two different forms:
- Grad PLUS - Graduate and professional students are allowed to borrow money to pay for their own education and all costs not covered by other financial aid/grants, up to the full cost of their attendance.
- Parent PLUS - These loans are the financial responsibility of the parent, not the student. They have a fixed interest rate and are not subsidized. Parent PLUS loans allow parents to borrow money to cover costs not covered by their student's financial aid package, up to the full cost of attendance. Financial need is not a requirement.
- Creditors show NO payment schedule in effect for the Student Loan.
- That translates to ZERO (0) monthly payment or obligation for the Loan.
In most cases (not all), a Mortgage Lender's Underwriter calculates the monthly obligation at 1% of the Student Loan's outstanding balance.
- The Student Loan type involved
- The Mortgage Loan Program being utilized
If considering this action, it's important to conduct thorough upfront research ... or seek professional guidance and assistance ... to arrive at the most advantageous decision and financial action. What is discovered and the actions taken could have short term or long term impact on the ability to finance a home. It could also do harm to your overall financial status.
If you hope to buy a home in the Chicagoland area ... either now or in the future and have Student Loans, be aware of these 3 key points:
- Not all Student Loans are the same
- Diversities exist between Student Loan types. They can affect the outcome of your home buying/mortgage financing efforts. Don't assume you know the outcome of a mortgage pre-qualification you haven't had.
- If you have Student Loans and hope to buy a home, it's no time to work with a rookie or inexperienced Mortgage Lender
Choose a Chicagoland Lender that knows and understands all the "species" of Student Loans made both thoroughly and well, how each can affect you financially, and how they can impact your ability to successfully buy and finance a home (both in the short and long term) and make monthly mortgage payments.
Contact me today. I'll put my 40+ years of mortgage experience hard to work on your behalf.
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