Will Student Loans Give Your Mortgage Application a Failing Grade?

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Posted: June 6, 2016 - Homebuyer's Blog

student loanFHA Changes Underwriting Rules

You may have heard aspiring homeowners across the country collectively gasp this past September 14 after the Federal Housing Administration (FHA) changed the rules by which they calculate Debt-to-Income ratio (DTI) for outstanding student loans. With 43 million people owing an estimated $1.2 trillion   in student loan debt, there is little doubt that this rule change dashed more than a few dreams of home ownership.

Prior to September 14, FHA rules did not consider your loans against your DTI if they were in deferment or forbearance. The new rules, however, have eliminated that exception and lenders must now consider all of your loans when calculating your debt obligations.

Considering how more than 30% of federal Direct Loans that have entered repayment are in deferment and the Bipartisan Policy Center reports that a whopping 44 percent of student loan borrowers under age 30 are in forbearance or deferment, this rule change will have a significant impact on young people trying to start their lives as well as on the housing industry.

What Is My DTI?

Your DTI is crucial to qualifying for a mortgage. It is calculated by dividing your gross monthly income (that’s pre-tax income) by your monthly debt service. Credit cards, car loans, personal loans, and student loans are all a part of that. Many lenders feel that anything higher than 41 percent – including your estimated mortgage payment – is a riskier bet since you are more likely to default on your debt.

How Is Student Loan Debt Calculated?

While each situation is unique and a variety of factors affect your mortgage application, the following chart provided by mortgage lender Guaranteed Rate is a great place to start.

According to the chart, if your loan is in deferment or forbear- ance Guaranteed Rate must use 1% of the outstanding balance to calculate the payment for qualifying purposes for most loan types. This means that a $30,000 loan in deferment would add

$300 to your DTI. The only exception is a VA loan, in which case the lender must use 2% of the outstanding balance.

What Are My Options?

While this rule change will put home ownership on the back burner for some while they pay down loans and save for a larger down payment, it doesn’t have to signal the delay of a dream for everyone with student loans.

One option you may want to consider is selecting an Income-Based Repayment (IBR) plan to lower your student loan payments. If your payment is listed on your credit report or you have documentation from your lender, your actual documented payment may be used to calculate DTI depending on the loan type. Talk to your student loan servicer to find out what you qualify for and how it would affect your payments.

Another option is paying off or consolidating other revolving debt to lower your monthly debt service. If your gross monthly income is $4,000, your estimated mortgage payment is $1,000, and your documented student loan payment is $300, your DTI is 32.5%. Add a $250 car payment and $150 in credit card payments, and your DTI shoots over 42%. Pay off the credit cards, and your DTI lands below 39%.

Just like when you were in school, if you do your homework and prepare your financial picture before applying for a mortgage, your lender just might give you an A!

Hartz and Guaranteed Rate Want to  Help

You already know that there are many benefits to building your new home with Hartz, but did you know that one of them is the advantage of choosing to work with our preferred lender? Hartz and Guaranteed Rate offer knowledge and resources designed to make the home buying experience easier for you.

Rebecca Mott, VP of Mortgage Lending and New Construction Specialist with Guaranteed Rate, offers the best advice when qualifying for a mortgage. “The first step is to speak with a reputable lender such as Guaranteed Rate so you will be pre- pared for what is required. It is extremely important to get all documentation to your lender promptly versus having a fire drill at closing.”

Call Hartz to speak to one of our New Home Specialists today and we can help you live your dream of home ownership … even with student loans!

How to Document and Calculate Student Loan Debt