Mortgage Guidelines On Student Loans And Debt To Income Ratios

This Article Is About Mortgage Guidelines On Student Loans And Debt To Income Ratios

Two of the biggest negative factors that affect home buyers from qualifying for mortgages are auto loans and student loans. The reason the auto loan is a problem is due to the short amortization. Most auto loans are amortized over three to seven years. Car prices have skyrocketed over the years. Although average cars cost $30,000, there are many that cost $50,000 to $80,000 or even more. Payments on higher-end vehicles can top $1,000 per month. It is not the cost of the car but rather the minimum monthly auto payment that affects the debt-to-income ratios of borrowers when qualifying for a mortgage. Student loans can often be deal killers when applying for a home mortgage. Deferred student loans that are deferred longer than 12 months are no longer exempt on any loan programs with the exception of VA loans. VA loans still exempt deferred student loans that have been deferred longer than 12 months. FHA, VA, USDA, Fannie Mae, Freddie Mac require to still count hypothetical monthly payments on outstanding student loan balances when calculating debt to income ratios. Every home mortgage program has its own guidelines when it comes to student loan debts.

How Student Loans And Auto Loans Affect Buying Power On A Home

Two of the largest debts that affect buying power on a home purchase are student loans and auto loans. Auto and Student Loans are the two biggest ticket items that affect borrower’s debt-to-income ratios. Average new autos cost $30,000 and the average monthly auto payment is $400. A $400 monthly payment is equivalent to an $80,000 mortgage. Student Loans have very high balances. Deferred student loans that are deferred to longer than 12 months are no longer exempt from debt to income ratio calculations with the exception of VA loans. In this article, we will discuss and cover qualifying for a mortgage with high outstanding student loans.

Qualifying For Mortgage With High Student Loan Balances

Mortgage Guidelines On Student Loans have changed with government and conventional loans:

• Costs for post-high school education are the fastest rising costs
• College tuition has been rising year after year for the past few decades
• Tuition at colleges and universities has increased over 800% since the early 1980s
• There is no sign that it will not continue increasing

The average cost of tuition with room and board at a state university is $50,000:

• It is double that figure at private universities

It is almost impossible for an average American Family to cover the cost of college tuition:

• In order to be able to attend college, students will need to apply for student loans
• It is not uncommon for homebuyers to have student loan balances of over six figures
• This holds true especially for doctors, lawyers, and educators

Although many college graduates may have zero payment IBR Repayment Plans or deferred student loans, there are Mortgage Guidelines On Student Loans.

How Mortgage Guidelines On Student Loans Affect Debt To Income Ratios

All mortgage loan programs have a specific debt-to-income ratio requirement. Debt to income ratios is calculated by taking the total monthly payments of borrowers and dividing it by the borrower’s gross monthly income. Student Loans have a big impact on debt to income calculations. Mortgage underwriters will take 1.0% of the outstanding student loan balance and use it as a hypothetical debt unless certain exemptions apply which we will discuss in the following paragraphs. Holds true especially with borrowers with large student loan balances.

Types Of Debt To Income Ratio

There are two types of debt to income ratios:

Front End Debt To Income Ratio:

• Front End DTI is calculated by taking the housing payment (principal, interest, taxes, insurance, homeowners association if applicable) then diving it by the borrowers’ gross monthly income

Back End Debt To Income Ratio:

• Back End DTI is calculated by adding the housing payment  (PITI) PLUS all other minimum monthly debts (student loans, car, credit cards, installment debts, and other minimum monthly payments reporting to credit bureaus) and dividing it by the borrowers monthly gross income

Mortgage Guidelines On Student Loans differs depending on the particular mortgage loan programs.

The Mechanics Of Student Loans And How Student Loan Payments Are Calculated

There are various ways on how student loan payments are calculated. Student Loan Providers work with their clients on the minimum payment due. Here are the ways student loan payments are calculated and repaid:

• Standard Repayment Plan
• Extended Repayment Payment Plan
• Graduated Payment Plan
• Income-Based Repayment also known as IBR
• Income-contingent Repayment Plan
• Deferred Student Loans where no payment is required
• Pay As You Earn Repayment Plan

Which repayment plan is used by mortgage lenders?

• Lenders will use a repayment plan depending on what FHA, VA, USDA, Fannie Mae, and/or Freddie Mac allows
• Lenders will follow Mortgage Guidelines On Student Loans on particular mortgage loan programs
• HUD, the parent of FHA, used to exempt deferred student loans that have been deferred for 12 or more months from DTI calculations
• This is no longer the case

VA Mortgage Guidelines On Student Loans

Out of all mortgage loan programs, VA allows deferred student loans that have been deferred for longer than 12 months from debt to income ratio calculations. Veteran borrowers need to get a written statement from their student loan provider stating that their student loans will be deferred for at least 12 months beyond the closing date of their VA Home Loan. If this can be provided, then there is no monthly payment figured in debt to income calculations.

Right-hand rule, how student loans are calculated on VA Loans is by:

• Taking 5.0% of the outstanding balance of the student loan and dividing it by 12 months
• That figure is the student loan payment that is used by mortgage underwriters
• Turns out to be below 0.50% of the student loan balance

If the student loan is currently in repayment and/or is scheduled to start within twelve months of the home closing, lenders need to calculate student loan debt as follows:

• Mortgage Underwriters needs to use the monthly student payment that is reported on borrowers credit report if the payment is larger than the above calculations
• If the monthly student loan payment that is being reported on credit bureaus is smaller than the threshold calculations above, a statement by the student loan provider that contains the actual payment can be used
• Most lenders will require a credit supplement

Conforming Mortgage Guidelines On Student Loans

Conforming Mortgage Guidelines On Student Loans are different than those of government loans. Conventional Loans are called conforming loans because they need to conform to Fannie Mae and/or Freddie Mac Guidelines. The Federal Housing Finance Agency (FHFA) is the governmental regulatory agency that regulated Fannie Mae and Freddie. Conventional Loans allow the minimum payments reporting on borrowers’ credit report as the monthly payment to calculate borrowers debt to income ratios. This figure can be income-based repayment programs (IBR). IBR can be used with Conventional Loans. This holds true as long as the student loan provider is reporting the IBR Repayment on the borrowers’ credit report. If they are not reporting on the credit report, borrowers need to get a written document by the student loan provider stating the IBR Repayment. For borrowers who have student loan balances but the repayment did not yet start due to still being enrolled in school or the payment has been suspended for some time period, written documentation is required by the student loan provider with the zero payment due. A credit supplement needs to be done by the lender and reported on the credit bureaus. If no payment is reported on credit bureaus by the student loan provider due to being deferred, then 1.0% of the student loan balance is used as a monthly debt in debt to income ratio calculations.

HUD Student Loan Mortgage Guidelines

For student loans that are deferred, forbearance, and/or repayment, mortgage underwriters must use the following on FHA Loans:

• 1.0% of the outstanding student loan balance
• One percent of the outstanding balance will be used as a monthly hypothetical debt for debt to income ratio calculations
• Fully amortized monthly payment over an extended-term (normally 25 years) and reporting on the credit report

A calculated payment that will fully amortize based on the documented loan repayment terms, or a written letter by the student loan provider stating a hypothetical fully amortized monthly payments over an extended term will be required in lieu of the 1.0% of the outstanding student loan balance.

Again, to recap on how HUD requires lenders to calculate student loan debt in debt to income ratio calculations, the following applies:

• 1.0% of the outstanding balance of student loans are used as monthly debt in DTI Calculations
• Or the monthly payment that is being reported on credit bureaus by the student loan provider
• Or borrower can contact student loan provider and get fully amortized monthly payment over an extended-term (25 years)

This hypothetical monthly payment needs to be in writing by the student loan provider.

USDA Loans

USDA Loans have the same mortgage guidelines on student loans like FHA loans. The Mortgage Underwriter needs to calculate student loans as follows:

• 1.0% of the outstanding balance of student loans are used as monthly debt in DTI Calculations
• Or the monthly payment that is being reported on credit bureaus by student loan provider
• Or borrower can contact student loan provider and get fully amortized monthly payment over an extended-term (25 years)

This hypothetical monthly payment needs to be in writing.

Mortgage Guidelines On Student Loans And Lender Overlays

Home Buyers with higher student loan balances often run into obstacles when qualifying for home mortgages. Most lenders have overlays on government and conventional loans when it comes to debt to income ratios. For example, HUD Guidelines on debt to income ratios allow 46.9% front end and 56.9% back end DTI to get an approve/eligible per Automated Underwriting System Findings. However, many lenders have debt-to-income ratio caps at 45% to 50%. This holds true even though HUD allows up to 56.9%. Overlays are additional mortgage guidelines that are above and beyond those of HUD Guidelines where each lender can impose. Gustan Cho Associates is a national mortgage company licensed in multiple states with no overlays on government and conventional loans. We just go off by mortgage guidelines by FHA, VA, USDA, Fannie Mae, Freddie Mac and have zero overlays.

To qualify for a mortgage with a national mortgage company licensed in multiple states with no overlays, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. Or email us at gcho@gustancho.com.