Education is vastly important.
But student-loan debt, which is estimated at about 1.3 trillion dollars, represents a serious burden to individuals, as well as the national economy.
The real-estate market is considered one of the pillars of American prosperity, and homeownership is an important marker for the economy’s stability and strength. But when a borrower has student loans, it significantly reduces their chances of mortgage-loan approval.
It’s a serious problem, but some organizations are try to provide solutions. They can’t erase your student-loan debt, but they can help you get approved for an affordable mortgage loan.
Why is Student-Loan Debt Such a Problem?
Skyrockets Debt-to-Income Ratio
One of the major problems with student-loan debt is that it significantly increases a borrower’s debt-to-income ratio (DTI). According to an article from CNBC that discussed the student-loan crisis, almost 20% of people with student-loan debt who apply for a mortgage are denied because their debt-to-income ratio, which factors their monthly payments against their monthly earnings, is too high.
The article cites numbers from Harvard researchers who say the average annual income for a borrower with student loans is almost $60,000, yet almost one in five cannot get a loan. Student Loan Hero, a debt-information site, says that the average monthly student-loan payment for borrowers between 20 and 30 years of age is $351. This is a significant amount that can drive up DTI, making lenders uncomfortable when processing the loan application.
Harms Credit Scores
The article from CNBC also describes how student-loan debt can lead to a significant drop in a borrower’s credit score. In fact, roughly 8% of potential borrowers with student loans are unable to get a mortgage because of their credit. Borrowers who went into debt and then graduated into the job market were soon left with little choice; they had to leave their debts unpaid until they could find a better income. This can cause even the most frugal person to experience problems with their credit.
The credit-score system is far from perfect, but it remains one of the most important numbers for lenders in virtually every industry, including auto and mortgage lending. If you have struggled to make student-loan payments, it can drive down your score, making mortgage approval more difficult.
Makes a Down Payment Nearly Impossible
There are very few loan products and programs that don’t require a down payment. From FHA to Fannie Mae to jumbo loans, if you need to secure a mortgage, you will likely need at least 3.5% down. Usually, this number is about 5%. One of the few loan options that doesn’t require a down payment is a VA loan, but if you qualify for a VA loan, your education is likely paid for by the GI Bill; you wouldn’t have student loans, so it doesn’t really apply to this discussion.
Down payments, even on moderately-priced homes, can be significant. For example, if you have a home that is selling for $300,000, which in the San Diego market is certainly a moderate price, a 5% down payment would be $15,000. If you are paying $300 a month towards your student loans, along with rent, car payments, and the cost of living, generating this amount of money can be difficult. When borrowers are stuck with student-loan debts, the lack of a down payment, combined with a high DTI and a low credit score, can make getting a loan extremely difficult.
Fortunately, Fannie Mae, among other organizations, is making an effort to get more borrowers approved…
Fannie Mae is Trying to Provide a Solution
In April of 2017, Fannie Mae provided new guidelines that attempt to alleviate the student-loan problem. By providing three key changes, they have made mortgages more accessible to borrowers who are burdened with student loans.
Exclude Certain Obligations Paid by Others
Perhaps the most beneficial option for recent graduates, this change allows you to exclude debt that is paid by others. For example, if you have a debt obligation that is paid by others, say a car loan, credit-card debt, or even your student debt, you can have this removed from your official DTI. By removing this from your qualifying debt load, you’ll have a lower DTI, which could be the difference between approval and loan rejection.
To have debt obligations removed, you must show that someone else has been making the payments in full for at least 12 months. For example, if you have a car payment of $200, and your parent pays $150 while you cover the remaining $50, it cannot be removed. But if they pay the full $200, it can be removed.
Changing Student-Loan Payment Calculation
Previously, Fannie Mae had a rather complex system for calculating student-loan information. Now the company has refined and simplified their guidelines, making it easier for borrowers with student-loan debt to qualify.
Essentially, if a payment amount is shown on the credit report, that is the amount used for qualifying. (Simple, right?) If there is no payment amount, the lender will use either 1% of the outstanding balance or a calculated payment. By simplifying the process, Fannie Mae hopes that lenders will have a better chance at qualifying borrowers with student-loan obligations.
Pay Off Student Loans with a Lower-Cost Mortgage Refinance
One of the solutions that Fannie Mae has provided is to allow for cash-out refinancing that waives certain costs while taking out extra money (which is held against your home) to pay off student loans. This could help you pay off high-interest student loans and have all or most of your debt wrapped in one monthly payment.
With this option, you have to pay off all of your student loans and place them into the mortgage, but high-balance student loans are eligible.
Don’t Let Student Loans Keep You from Owning a Home
If you have student-loan debt, you can still get an affordable loan on a high-quality home. Let us help you find the right mortgage for your specific needs.
A very responsible and experienced professional with his highly effective team
I really enjoyed working with Chad Baker and the rest of the team. This was our first time buying a home in California and we started with unnecessary assumptions based on our previous experience as home-owners in a different state. Chad and his team were available throughout the whole process, explaining the state differences, answering all our phone calls and emails quickly and directly, and providing detailed weekly status reports so that all parties including agents knew exactly where we were in the process. Chad was very experienced and provided customized loan products for us to consider, which definitely facilitated our transaction. I recommend the Chad Baker team! ”
Thank you, Chad. You have been amazingly responsive to all my questions, and you have a great staff assisting you. Thanks so much for all your help!
“Chad, it was a pleasure working with you. Your loan was smooth, speedy, and we were kept well informed. I will make sure to prioritize offers where you are the loan officer as I know they run smoothly.”