How to get a Mortgage when you have Student Loans

Benjamin.Klar@usmortgage.com

www.KlarMortgage.com 

Direct # (207) 514-0753

How to get a Mortgage when you have Student Loans

For borrowers attempting to qualify for a home loan, debt matters. Student loans, however, may deserve special consideration.

For many recent graduates, student loans can be a major roadblock to the home purchase process. An August 2012 study, ‘’Denied? The Impact of Student Debt on the Ability to Buy A House’ was released by Young Invincibles, a policy research organization that focuses on young adults. The study found that student loans were a limiting factor for many would-be mortgage borrowers.

However, some lenders say student loans no different than any other type of debt and don’t raise any red flags on mortgage applications.

Student loans are “just another debt obligation that’s very common these days,” said Justin Lopatin, a private mortgage banker at PERL Mortgage in Chicago.

The facts about student loan debt aren’t pretty.

Student loan debt is growing at a rapid rate. Between 2007 and 2010, student loan debt increased almost all demographics and economic categories. In 2010, a record-breaking 40 percent of household heads age 35 or younger owed money on student loans. 

Meanwhile, credit bureau TransUnion reported that the average student debt per individual increased 30 percent, from $18,379 in 2007 to $23,829 in 2012.

Calculating your Debt-To-Income Ratio

When determining whether you qualify for a mortgage loan, lenders focus on your debt-to-income ratio (DTI), or total monthly debt payments relative to income.

Typically, a lender will examine a prospective borrower’s monthly housing expenses, student loan payments, minimum credit card payments, auto loan payments and other debts owed.

The threshold DTI is typically 43 percent; those who fall below this figure are considered qualified to borrow, while those above it are considered a default risk.

However, the FHA offers more lenient requirements for mortgage loans and may exclude student loan payments which are deferred until at least a year after the expected closing date when calculating DTI.

So what’s the solution for individuals who still owe money on student loans? Increase your income or pay down debt before you attempt to apply for a mortgage. Once you apply, any debt you pay down doesn’t count towards lowering your DTI.

Consider adding a co-signer, such as a parent, to improve your chances of being approved on a loan.

Watch out for CAIVRS

If your student loan is in default, avoid applying for an FHA, VA or USDA mortgage loan. As part of the approval process, your lender is required to check the status of the applicant’s other government-backed loans. The Credit Alert Verification Reporting System (CAIVRS) will alert the lender to any student loan defaults hiding in your past.

In addition, individuals who are still in school or going back to school should avoid shopping for a student loan during the mortgage application process. Before closing, the lender will review a copy of the applicant’s credit report; any new inquiries (such as those triggered by an application for more student loans) could seriously undermine the borrower’s chances of qualifying for a mortgage.