Student loan debt is becoming a hot topic and not only for those who have it, but also in broader, national economic terms. The rising costs of education and a shift in cultural attitudes has led to many college graduates entering “the real world” already burdened with tens of thousands of dollars in debt. In fact, one recent study reported that 7 out of 10 graduates have student loan debt and the average amount is around $30,000.
Mortgage lenders are required to establish your ability-to-repay when they approve you for a mortgage to purchase a home. So, it makes sense that all your debts, including your student loan debt, would be considered in determining whether you will be able to afford the mortgage payment or not. The key area that will be affected is in your debt-to-income (DTI) ratio.
Most loan programs require your DTI to be under a certain percentage, which could be as low as 38% to perhaps as high as 45-50%. You calculate this ratio by taking all your monthly payments, not counting utilities or insurances but including actual or estimated student loan payments, plus your proposed housing payment (including taxes and insurance) and dividing it by your monthly gross (pre-tax) income. So, to make a very quick and simple point, if your student loan payment is $200, that is $200 less that you can apply toward your proposed mortgage payment, meaning the amount of money you can borrow to buy a home will be lower.
Where it gets particularly tricky is if your student loans are deferred or if you are in an income-based repayment plan (IBR.) Loans in deferment do not provide a reliable estimate of what the payment will be once repayment begins and IBR’s are unstable. They can go up, which would impact your ability-to-repay and lenders can have actual legal liability under that ability-to-repay rule so it is a risk to use any lower payment that is not certain to continue.
In fact, Fannie Mae’s rules do not reference an IBR at all. They require lenders to use one of three methods to calculate the payment that should be used in qualifying:
- 1% of the outstanding loan balance
- The standard repayment plan amount which is commonly listed on your credit report
- The calculated payment if amortized over 20 or 25 years
The first two of these will almost always be considerably higher than any IBR plan; the third could potentially be close to the IBR amount (or not, it could be higher, too.)
The best thing you can do is figure out what your student loan payments would be under all three of the calculations above. If you contact me, I can help assess that and we can see what impact each will have on your ability to qualify for a loan amount that you can afford and will meet your goals. It may be that you can qualify for the price range you want to be in with even the highest potential student loan payment calculation. Plus, there are many different mortgage programs and not all of them treat student loans as described above. The key is to gather all the information you need to make an informed decision. I can help you do just that.