Student Loans – from a qualifying standpoint

We have talked in the past about student loans and how it is my opinion that this will be the next financial crisis faced by the American public.  Americans owe over $1.4 trillion in student loan debt, spread out among about 44 million borrowers. That’s about $620 billion more than the total U.S. credit card debt. The average Class of 2016 graduate has $37,172 in student loan debt, which is up six percent from 2015.  This is not something that is going away any time soon and it has a significant effect on first time home buyers and the age that they are able to buy their first home.  But what I want us to look at today is how we (mortgage lenders) consider student loan debt from a qualifying standpoint based on the most common types of mortgage loans they are eligible to obtain.

·        Conventional (which includes the 97% Home Ready program) – we use whatever the credit report reflects as the monthly payment for qualifying purposes.  If there is no payment listed, the loan is in deferment for example, then we have to use a 1% of the total balance as the monthly payment unless the borrower can provide paperwork showing what the exact payment will be when repayment begins.  So if the student loan debt is $50,000, the borrower has no payment and no documentation reflecting what the payment will be, then we have to count a $500 monthly payment when calculating the debt ratio.  But if there is a payment listed on the credit report, we go with that payment.

·        FHA – we use the greater of the payment that is listed on the credit report OR 1% of the balance when calculating debt ratios.  As an example, if the borrower has $50,000 in student loan debt with a $250 monthly payment (typical for someone in an income based repayment plan) or no payment because the loan is in deferment, we would have to count a $500 payment when calculating the debt ratio even though the required payment is much less.

·        THDA – same as FHA

·        USDA – same as FHA

The requirement that FHA, THDA and USDA have of counting a minimum of 1% for student loan debt can play a significant role in qualifying a first-time home buyer for a mortgage.  It is important that we (everyone involved in a real estate transaction) understand the implications of this and make sure both we and our buyers understand it.  The price a buyer can qualify for is limited by what debt ratios allow and our requirement to potentially count a higher payment for student loans in that ratio, than what the borrower is actually paying, can certainly lower the price he/she can afford.