Your Student Loan Credit May Secretly Limit Your Mortgage Options

If not handled properly, your student loan may adversely change your home purchase plans. Here’s what you probably don’t know regarding your student loan servicer…

Just like any other credit obligation, your student loan servicer reports to the credit bureaus. Even if the payment is deferred, the obligation still reports every 30 days much like a credit card payment or a car loan. If you have a student with one lump monthly payment, your credit report may not always reflect the same. Let’s say for example your entire student loan is $500 per month for $80,000 loan, but the credit report shows multiple loans with varying payments comprised of multiple student loans with the same servicer. This where things can become dicey because this inaccurate reporting an inconsistency with liabilities. The payments on each liability is what your mortgage lender uses to calculate your payment to income ratio – an important barometer of creditworthiness in the home buying process.

When you apply for a mortgage loan to buy a home, lenders take into consideration your credit score, your monthly income pretax and your current liabilities in determining how much house you can purchase in relationship to your financial capacity. The way the lender computes your debt to income ratio is they take the proposed new housing payment comprised of property taxes, insurance and the repayment of principal and interest as well as any applicable mortgage insurance and they add to that figure to any other liabilities outstanding such as a car payment, a credit card payment or student loan payment. Generally, banks want a debt load no bigger than 45% of your monthly income, but 36% or lower is considered more financially sound.

A workaround is walking your lender through each payment liability obtained from the credit report, including educational related debts, even if the student loan/s is deferred. It’s imperative for example that if ABC Student Loan Servicing is reporting $600 per month in student loan payments, but your actual statement is $500 per month you have your mortgage company perform a credit supplement. A credit supplement is used in the lending industry to verify credit accounts including payments. This can solve any issues arising from the way your student reports to the credit bureaus for mortgage qualifying purposes.

Mortgage Tip: if you have student loans whether you’re looking at a Conventional loan or an FHA loan, any deferred student loan payments must be counted in your payment to income ratio. Deferred student loans can no longer be ignored when payment are not due.

Any inconsistencies in student loan reporting requires the lender to use what the credit report shows unless a statement can be provided showing the correct payment. This statement may also be in the form of the letter from the loan servicer detailing the specific payment amount due or what the proposed monthly payment will be. Without such documentation the lender will have to take a more conservative approach using 2% of the balance as a monthly payment to qualify. Using our $80,000 example above, that represents $1,600 per month payment driving buying power down to the tune of approximately $200,000.

Mortgage tip: the key with a student loan payment or any other payment obligation is to remember it’s not what you owe that counts, it’s what is due that counts (think minimum payments). If you make a principal prepayment on a credit card payment for example i.e. paying more to save interest is a smart financial move, but the lender is more interested in cash flow after payments on debt and a mortgage payment using gross income.

As a good rule of thumb -if you’re trying to cherry pick debts to eliminate in order to improve your home buying figures, such as paying off the student loan versus another, pick the obligation that has the highest monthly payment associated with it with the least amount of monies due, doing so makes will provide you the biggest bang for your buck.

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