With graduation season upon us, student loan repayment clocks will start ticking. So I decided to tackle a small but significant question in qualifying for a mortgage. Banks and lenders take a look at a borrower’s capacity to repay a mortgage loan along with the rest of their debts.
When analyzing a borrower’s income and debt, we have debt to income (dti) ratios to adhere to. Generally, housing expense to income should not exceed 35% of a borrower’s income. Total debt, including housing expense, car loan payment, and student loan and credit card payments should not exceed 45-50% of income. Again, keep in mind this is a general rule. Just because someone does not have additional obligations over their housing expense does not automatically mean lenders will allow housing expense to go up to 50% of someone’s income. This is a common misconception. Below are the guidelines for those types of loans depending on the type of financing for a home that is requested.
Deferred Installment Debt for Conventional Loan Qualifications
Deferred installment debts, such as deferred student loans, must be included as part of the borrower’s recurring monthly debt obligations. If the borrower’s credit report does not indicate the monthly amount that will be payable at the end of the deferment period, the lender must obtain copies of the borrower’s payment letters or forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower’s total monthly obligations.
Exception: For a student loan, in lieu of obtaining copies of payment letters or forbearance agreements, the lender can calculate a monthly payment using no less than 2% of the outstanding balance as the borrower’s recurring monthly debt obligation. However, if any documentation is provided by the borrower or obtained by the lender that indicates the actual monthly payment, that figure must be used in qualifying the borrower.
Deferred Installment Debt for FHA Loan Qualifications
Debt payments, such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing, must be included by the lender as anticipated monthly obligations during the underwriting analysis. Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12 month timeframe.
Deferred Installment Debt for VA Qualifications
If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis. If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.
Student loans can be in deferment for a period of time and many borrowers think they should not be counted in their dti. It is important to check qualifying guidelines with you mortgage lender. If you have any questions or comments, please contact me at Ingrid.firstname.lastname@example.org or visit http://www.scottsdalemortgageexpert.com or http://www.cobaltmortgage.com/ingridquinn.