For anyone who has tried to apply for a mortgage and had student loans, they know whats it’s like to be scrutinized and questioned by the mortgage company over the validity of the those obligations. Like other forms of debt, like car loans or credit cards, student loans fall into the same classification, debt made against income or rather an ability to repay. Just as all consumer debts, student loans reduce the ability to borrow because they err-ode income.

Quick Life-Cycle: Student Loan To Home Loan

Consumer decides to take out out various large student loans in excess of $50,000 (average amount) to pay for college tuition

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 Finishes college in hopes to land an occupation with the expectation to earn income large enough to afford student loan payments and a housing payment

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 Enter: Decision to buy a house

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Consumer speaks with a mortgage lender about purchasing a house

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 Student loans resurface into financial picture reducing purchasing power

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 Consumer’s expectation of purchase price becomes “subject to change” based upon all liability payments

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  Consumer purchases a house with student loan payments accounted for and makes timely repayments of principal and interest on both mortgage and student loans

Student loans are reported on a credit report just as any other payment obligation. In many instances, the student loan payments are deferred, extended to future date when payments kick-in if they have not already. Lenders are required by law to account for all material debts known to them in the supporting documentation a borrower provides in obtaining a home loan. Student loans can show a payment at $50 per month on a given obligation all the way up through $100 per month and higher. It’s not so much the monthly payment per student loan that lenders have to offset, it is function multiple student loans with various lenders, each showing a different payment. Tallying all the payments together,  is where things change.

For example a consumer’s credit report might show six separate student loans totaling $40,000 each with a payment at $80 per month. That it equates to a $480 per month obligation, which can reduce borrowing power by upwards of $60,000!

How To Protect Your Mortgage Application Being Denied

Consumers would be well suited to avoid private lenders when obtaining student loans. Private lenders charge significantly higher rates of interest and shorter-term amortizations can inflate the payments resulting in more forgone power.

Further tips:

• If you have multiple student loans, consolidate them into one loan to reduce total student loan payments (speak to a lender first)
• If student loans are consolidated and they don’t report that way on the credit report, lender has to use the information they have showing the higher payments because that’s what the credit report reveals unless further supporting documentation can be provided to show each loan has been consolidated into one new debt
• Avoid any student loan delinquencies, especially in the last 12 months, ignoring this, could result in your application being denied for a government loan. Government programs our strict about delinquencies on federal debt which is what a student loan is.
• If student loans report as deferred on your credit report, get the specific payment amounts from the servicier or a letter from the servicier stating an approximation of what the payments will be when they come due and payable.
• If a payment letter cannot be obtained, the lender will use 2% of the principle balance to determine appropriate payment obligation for qualifying
• If any student loans are paid off in full, but credit report shows there is a current payment obligation, provide supporting documentation showing that has been paid off in full to the mortgage company

*Credit Caveat- if a student loan is in deferment for 12 months or longer only on an FHA Loan, can the payment be omitted from the lender’s qualifying ratios used to determine ability to borrow.

Tidbit  on qualifying for a mortgage out of college

If you are a previous student, and have a limited work history and student loans, you can still potentially qualify for a home loan if  your field of study was in direct relationship to your of employment. For example you have a degree in accounting and you’ve recently taken a job as an accountant. In such a scenario if you are previously a full-time student, and you are not required to file a federal income tax return, you can still qualify for financing as you were required to file IRS tax returns.

If you have student loans are trying to qualify for a mortgage, or recently took a job out of school, we can help you become eligible to finance a house. Start today by getting a complementary mortgage rate quote or contacting Scott.Sheldon@nafinc.com with your scenario.