If you’re getting mortgage financing to purchase or refinance a house here is the number one thing that you’re going to want to avoid if you have a student loan.
FHA mortgages and student loans do not mix here’s why… The Federal Housing Administration specifically requires the lender to use the highest possible amortizing payment the student loan could ever maximally be at. Most student loans most consumers are paying on are not specifically reflective of the highest possible amortizing payment. Perhaps it is an income payment driven repayment or the loan is deferred for a certain. This may adversely affect your debt to income ratio. In other words, if your student loan payment says $200 a month and that’s what you’ve been paying on, but the actual payment that would be due that’s fully amortizing reflective of paying off the loan on the amortization schedule is a $600 a month, the lender must use $600 a month to qualify in other words that $400 disparity could influence your buying power by as much as $80,000 depending on your amount financed.
Here’s where student loans become particularly problematic when you’re working with an FHA loan-bad credit. Bad credit and FHA loans and student loans are a loan doomed for problems. Here’s why FHA Loans that contain bad credit typically have higher mortgage rates and higher fees. You’ll need to qualify to offset the higher-priced mortgage, and the higher payment on the student loan in order to qualify so it becomes a double hit. It becomes particularly challenging to have to support if you are working with a little down payment such as 3.5% down to purchase a house.
While these loans are not impossible to close they are particularly technical. Putting together such a loan package requires a significant amount of due diligence at the beginning of the process ( pre-approval stage) to make sure the loan is fully vetted. Keep this in mind if you have a student loan and your credit is less than perfect. The best piece of advice? Raise your credit score or go with a conventional loan which does not contain such arduous requirements for qualifying with the student loan. Note in order to get a conventional loan a good rule of thumb is to have a target credit score somewhere in the 680 range at the minimum or higher in order to offset the higher loan costs otherwise brought on by a lower credit score.
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