Mortgage Shopping for Those With Student Loans
This post originally appeared on HSH.com.
Debt is always a factor in whether you can qualify for a home loan. But whether student loans, in particular, present any special concerns is a matter of opinion.
An August 2012 study, “Denied? The Impact of Student Debt on the Ability to Buy a House,” found student loans could be a stumbling block for recent graduates who are single or married to a spouse who also has student loans. The study was released by Young Invincibles, a policy research organization that represents young adults.
But Justin Lopatin, a private mortgage banker at PERL Mortgage in Chicago, says student loans don’t “present a red flag or any alarm or nervousness.” Rather, they are “just another debt obligation that’s very common these days,” Lopatin says.
Student-loan debt is on the rise
Either way, there’s no question that student debt has been on the rise.
Recent analysis by the Pew Research Centerfound both the incidence and amount of student debt increased from 2007 to 2010 for households in nearly every demographic and economic category. In 2010, a record 40 percent of all households headed by someone age 35 or younger owed such debt.
A separate study by credit bureau TransUnion found the average student debt per borrower jumped 30 percent from $18,379 in 2007 to $23,829 in 2012.
DTI is crucial DTI is what matters most
Still, the fact that you have student loans or the amount of your student loan debt isn’t as crucial as your total monthly debt payments relative to your income, a calculation known as a debt-to-income ratio, or DTI.
Most lenders calculate a front-end DTI, which compares your monthly housing expense — including your mortgage payment, property tax and homeowner insurance premium — to your income, and a back-end DTI, which compares your monthly minimum payments for credit cards, car loans and other debts to your income.
For example, if your monthly gross income before taxes was $3,000 and your housing expense was $850, your front-end DTI would be 850 divided by 3,000, or 28.3 percent. Add to that a monthly student loan payment of $300 and a minimum credit card payment of $50, and your back-end DTI would be the sum of 850 plus 350, or 1,200, divided by 3,000, or 40 percent.
The 31/45 rule
Lenders typically want your front-end DTI to be less than 31 percent, and your back-end DTI to be less than 43 percent.
The Federal Housing Administration ( FHA) typically allows more flexibility. The FHA also excludes student loan payments that are deferred until at least 12 months after the anticipated closing date from your DTI, according to David Krichmar, a mortgage banker at CORE Lending in Magnolia, Texas. That could help you qualify for a loan.
More income, less debt
If your DTI is too high, you’ll need to increase your income or reduce your debt. If you decide to pay off a credit card or car loan, you’ll need to do that before you apply for your mortgage.
“You can’t submit your loan to underwriting, then pay down (debt) because then, you’re paying down debt to qualify, which typically isn’t allowed,” Lopatin explains.
Another strategy is to add a co-signer.
“The majority of the time, parents are in a better place financially. Their home might be paid off or they have less bills and more income,” Krichmar says.
Be careful of CAIVRS
A bigger problem might be a student loan that’s in default.
If you’re applying for an FHA loan or a loan guaranteed by the U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture Rural Development agency (USDA), the lender will access the federal Credit Alert Verification Reporting System (CAIVRS) database to find out whether you’ve neglected to pay other government-backed loans you already have.
“That’s a huge deal because many times that report is not pulled until after the loan is started,” Krichmar says.
Don’t shop for more student loans while you’re attempting to get a mortgage because the lender will pull a copy of your credit report prior to closing and if that report shows new inquiries, you’ll have to sign an explanatory statement, Lopatin says. If those new loans are imminent, they might be added to your DTI and that could derail your mortgage.
The bottom line is that student loans can impact your ability to qualify, but if you earn enough income to support your debts, you should still be able to purchase the home you want.