According to data from the Pew Research Center, 37% of American adults ages 18 to 29 have student loan debt. Even between the ages of 30 and 44, almost a quarter of the country has student loans.
For all borrowers, the average is about $17,000 in debt, if you got your bachelor’s, the average is $25,000. And if you earned a post graduate degree, your average debt load is $45,000!
We don’t bring up these numbers to scare you, and we won’t pretend to have an answer to this problem, which is labeled by many as the “student loan crisis.” We bring up these numbers to remind you that if you have student debt, you are not alone.
Student debt can create challenges for future borrowing, but because the problem is so widespread, major lending institutions have attempted to address the situation, providing options no matter how much you owe.
Getting a Mortgage While Paying Student Loans
Student Loans Create Complex Challenges for Mortgage Lenders
If you’ve read many of our blog articles, you may have noticed that we encourage borrowers to think like lenders, as it helps you understand what they are looking for, and allows you to make the right decisions to increase your chances of approval. We’d encourage you to do the same with student loans.
Lenders face a challenge, albeit a common one, when someone has student loans, and many of the top mortgage-lending organizations, including Fannie Mae and Freddie Mac, haven’t seemed to completely land on specific guidelines. This is largely because the state of higher education is changing, effected in large part by the student-debt crisis. These changes, as well as the unknowns for the future, make these companies unwilling to define guidelines for borrowers with student loans; after all, they could write guidelines, and five years later things could change drastically.
Here’s one of the main problems: student-loan payments on a borrower’s credit report may or may not be the actual number that person has to pay in the future. A borrower may have a total student-loan debt of $50,000, but the credit report shows only $50 a month in payments, which likely means the borrower is on an income-based payment plan; as soon as she makes more money, she will have to make larger student-loan payments. If a lender were to base your ability to repay a mortgage loan on the $50 payment, there could be trouble when the borrower’s payment goes up to $250.
It can be complex, but Freddie Mac has made some guidelines to help clarify the situation, giving lenders clear instructions for their processes, and (more importantly) allowing borrowers to get an affordable mortgage, no matter what their student-debt load.
How Lenders Deal with Student Loan in Repayment
Debt-to-income ratio, which compares monthly payments to monthly income, is an important factor for mortgage lenders. But to understand debt-to-income ratio, you have to know how much a borrower owes every month. And as we’ve demonstrated, this can be tough for people with student loans, who have payments that tend to change. Fortunately, Freddie Mac has provided some guidance.
If you are currently repaying your student loans, the lender will basically use one of three numbers for calculating your debt-to-income ratio. The first is your monthly payment amount that is shown on your credit report. The next is .5% of the original loan balance, while the third is .5% of the current loan balance, which ever is greater. (Loan balance can go up with interest.) Whichever of these numbers is greater, this will be the amount used to calculate your debt-to-income ratio.
How Lenders Deal with Student Loan in Deferment or Forbearance
Previously, if no monthly payment was shown on your credit report and there was no documentation in the mortgage file, indicating the proposed monthly payment amount, the lender would use 1% of your student-loan balance to calculate your total debt-to-income ratio.
Now, however, lenders are required to use a similar process as loans in repayment. The lender will either use the monthly payment amount or 1% of the original loan balance. However, if the outstanding loan balance is greater than the original, the lender will need to use 1% of that number.
This process allows lenders to account for the student loan plans, providing a fixed payment based on the total amount owed. Essentially, it gives lenders a general idea of how much a borrower will have to pay towards their student loans, which will open better borrowing opportunities. This also provides a simple approach to dealing with loans in forbearance, and could make the process easier and more efficient for both lenders and borrowers.
Student Loan Forgiveness, Cancelation, and Repayment Programs
So what if your student loans will be forgiven, canceled, or you are involved in a repayment program? Essentially, what happens if you probably don’t have to pay back the amount?
In this case, the student loan debt can actually be excluded from your debt-to-income ratio, but you will have to provide extensive documentation proving that the student loans will be taken off your financial picture.
The documentation must first show that the student loan has ten or fewer monthly payments remaining on the schedule until the full balance is forgiven. So if you have to make ten more payments until the loans are erased, it can be taken off the DTI. If you have 11 more monthly payments, it remains.
You may also need to show that the student loan is deferred or in forbearance and the full balance of the student loan will be forgiven, cancelled, or discharged.
You will also need to demonstrate that you currently meet all the requirements for student-loan forgiveness or cancellation and prove that the seller is not aware of any situation that would make you ineligible for loan forgiveness or cancellation in the future.
These provision provide additional flexibility to borrowers, which could help you exclude the loans from your official DTI. If it’s likely that your loans will be taken off the table, this helps you maximize borrowing power, resulting in a better home for you and your family.
Let Us Make Getting a Mortgage While Paying Student Loans Simple for You
If you have questions about getting a mortgage loan with student-loan debt, San Diego Purchase Loans is here to help.
