Tag Archive for: student loan debt

Can I Qualify for a Mortgage With Student Loan Debt?

May 11, 2022
mortgage blog, student loan debt, graduation

Graduation season is here! For many college graduates, student loan debt can turn into long-term financial stress. Even years after graduation, student loan debt can keep people from realizing dreams of homeownership. Add the recent economic shifts and inflation, and buying a house right now might feel downright impossible. This article can help bring some good news and help you make a plan.

If you’re getting ready to buy a house for the first time, but you’re worried about how your student loan debt will affect your mortgage, keep reading. A steady job and a good handle on your monthly expenses will take you farther than you think, especially if you’re a first-time homeowner. 

One of the best moves you can make is to lock in your rate today by getting pre-approved, which we blogged about here.

How to Buy a House With Student Loan Debt

This article will explain how student loans affect your home loan eligibility and how to qualify for a mortgage. Specifically, how to apply for a mortgage and get a home loan while you’re still paying off your student debt. 

A great first step is to connect with a mortgage advisor. You’ll be able to get personalized advice about your situation and find out about custom mortgage options. Start here to find a local advisor.

Three Factors That Affect Your Eligibility When You Apply for a Mortgage

#1 Debt to Income Ratio (DTI)

Your debt-to-income ratio impacts your buying power the most. Lenders compare your gross monthly income against your monthly debt obligations to determine how much you can afford to borrow. A DTI ratio higher than 43% can make it difficult to qualify. But there are select options for borrowers with student loan debt.

#2 Credit Score

A good credit score will get you a better home loan and a lower mortgage rate. But there are also special programs available for first-time homebuyers who have a lower credit score.

It’s always a good idea to download a free copy of your credit report. This will allow you to fix any errors, dispute incorrect information, and know your credit score.

#3 Down Payment

A larger down payment can often lock in a better rate and a more affordable mortgage payment. Ask your mortgage advisor about using investment stocks, retirement funds, gift funds, or borrowing from other sources.

Related: How to FAST TRACK your mortgage pre-approval

Best Home Loan Options for Homebuyers With Student Loan Debt

Related: Does every mortgage need an escrow account?

How Debt-to-Income Ratios Affect a Mortgage Application

When you apply for a mortgage, your debt-to-income ratio directly impacts your eligibility, your rate, and your loan terms.

Why? Lenders compare your total monthly income with monthly debt repayments to determine how much you can afford. For this reason, it can be difficult to qualify if your monthly debt payments are higher than 40% of your pre-tax income.

This is where student loan payments make a significant impact.

Student loan payments are automatically included in your monthly debt balance, so they directly affect how much you can afford for a home loan. Since there are different student loan repayment programs, the structure of your specific student loan payment plan can make a big difference.

First, let’s look at how debt-to-income ratios are calculated. Then you can decide whether or not it’s a smart idea to restructure your student loan debt.

How to Calculate Your Debt-to-Income Ratio (DTI)

Figuring out your debt-to-income ratio (DTI) is easy.

First, write down your gross monthly income, then list all your recurring monthly payments.

Leave out expenses that vary each month, such as utility bills, entertainment, groceries, transportation, etc.

To calculate your DTI, combine your required monthly payments such as:

  •  Monthly rent or mortgage payment
  •  Student loan payment
  •  Minimum credit card payment
  •  Monthly car payment
  •  Any court-ordered payments (child support, back taxes, etc.)

Related: Boost your credit score in less than 60 days

Example: Calculating Your Debt-to-Income Ratio with Student Loans

For example, if your gross monthly income is $6,000, 43% would be $2,580. This is the maximum amount a lender would approve for a monthly mortgage payment for a conventional loan.

Next, it’s time to subtract your monthly debt repayments. For example:

  • Monthly car payment = $200
  • Credit card payment = $135
  • Student loan payment = $250

In this scenario, your monthly debt repayment would be $585. From the lender’s perspective, this means you have $1,995 available to make a monthly mortgage payment ($2,580 – $585 = $1,995.)

Note that your new monthly payment will need to cover your mortgage payment, homeowner’s insurance, property taxes, and mortgage insurance if required.

There are several loan options and custom mortgages available. Many home loans for first-time homebuyers offer home loans with 0-5% down. FHA loans only require a 3.5% down payment. Conventional 97 requires only a 3% down payment.

How Different Student Loan Repayment Programs Affect Your Mortgage Application

Finally, restructuring your student loans can help lower your debt-to-income ratio and be a better option than paying off your student loans.

Why? To apply for a mortgage, you’ll want to have a down payment ready as well as emergency funds. So you don’t want to deplete your savings to pay off your student loans.

If your monthly student loan payment is high, you might consider restructuring your student loan debt to lower your monthly payment. This will help lower your DTI.

Contact your student loan program and ask about the following options:

  •  standard repayment plan
  •  deferred student loan
  •  income-driven payment plan
  •  graduated payment plan

Don’t Let Student Loans Keep You From Buying a House

Buying your first home might be closer than you think, even while you’re paying off student loans. And several loan programs can work to your advantage, especially for first-time homebuyers.

Plan for your down payment, find out your credit score and calculate your debt-to-income ratio. Once you have a clear financial picture, you can consider restructuring your student debt to lower your DTI ratio.

Taking Action

Working with a local mortgage advisor can help you compare your best mortgage options, lock in the lowest mortgage rate, and secure the best home loan that fits your life goals. Even with student debt. Connect with a local mortgage advisor to discuss your options and save money on your mortgage. We’d love to help.

Now Use Rental History to Get Approved for a Mortgage

August 16, 2021
blog family on grass

We’ve got good news for qualified renters who are ready to buy a home. Fannie Mae recently announced a new mortgage lending rule that will make it easier for homebuyers to get a mortgage even without a long credit history. This new update expects to produce greater eligibility and higher approval rates for homebuyers with good rent payment history.

Why the Breakthrough Rule is Helping Homebuyers

Applying for a mortgage can feel like a huge undertaking. You’ve got to save for a down payment, organize all your financial documentation, verify income and employment status, and decide how much you can afford. Then there’s your credit report. If you have a high credit score, this is just a simple task to cross off the list.

But what if you don’t have an established credit history? What if you pay your bills on time and save every month, but you don’t have credit cards or car loans? It’s almost like you get penalized for living debt-free and managing your money well.

This new rule is shifting the tide. Higher approval rates are in store for homebuyers with good rental history.

RELATED: Find out if you’re eligible for additional first-time homebuyer advantages

How to Use Rent Payment History to Get Approved for a Mortgage

Just say yes! The new change will allow mortgage lenders to automatically integrate rent payment history to establish creditworthiness. Fannie Mae has updated the underwriting system to automatically pull rent payment history from your bank account. Your mortgage lender only needs one thing: your approval.

Why is this valuable?

Mortgage lenders look to credit history to assess risk. When a homebuyer has a high credit score and a solid credit history, they might qualify for a better mortgage. On the other hand, mortgage applicants with thin credit or short credit history are typically considered higher risk.

With the new rule in place, mortgage lenders can automatically include rent payments during the underwriting process. The updated software integrates with banks and credit unions to automatically recognize rent payments and populate your mortgage application with your rent payment history.

Based on Fannie Mae research which sampled mortgage applicants who were declined, “17% could have received an Approve/Eligible recommendation if their rental payment history had been considered.“

How will homebuyers benefit from the new Fannie Mae initiative?

Renters with “thin” credit and a consistent rent payment history will benefit the most. “Thin” credit typically refers to a homebuyer who doesn’t have much credit history to assess. So while there might not be any negative marks on their credit, there also isn’t much payment history to pull from.

For example, perhaps you don’t have any credit cards and never had a car loan. Or maybe you have student loans or credit cards, but the accounts haven’t been open for very long. In these situations, a rent payment history that shows consistent on-time payments could help you get approved for a better mortgage.

Before this new approach, mortgage lenders would ask landlords to verify rent payment history. The process was tedious and not always accurate.

Now, mortgage lenders can automatically integrate rent history into mortgage applications to help homebuyers establish creditworthiness.

What’s more, the new update will only affect positive change for eligibility. According to the press release, “the new update is a positive change for eligibility – only consistent rent payments will be considered to improve eligibility. For qualified renters who may have limited credit history but a strong rent payment history, [it] creates new opportunities for homeownership. Any records of missed or inconsistent rent payments identified in the bank statement data will not negatively affect the applicant’s ability to qualify for a loan sold to Fannie Mae.“

Side note, if you’re still paying off student loan debt, check out this recent post. You’ll find strategic tips to help you qualify for a mortgage.

How do I apply for a mortgage using rent payment history?

  1. Find out how much you can afford using this free mortgage calculator.
  2. Connect with a local mortgage advisor.
  3. Tell them you’d like to automatically include your rent payment history.
  4. Discuss your home loan options.
  5. Get your best mortgage!

A qualified mortgage advisor will help you build a credit profile to your advantage using your rent payment history. Once you start your application and access your rental history, your mortgage advisor can secure the best mortgage possible at the lowest rate.

What if I have a low credit score or bad credit? 

Rent history that shows on-time payments will help, but your credit report will have a bigger impact on a mortgage lender’s final decision. In this case, it’s better to work on raising your credit score quickly. Check out this short read with actions you can take to boost your credit score in less than 60 days, which we blogged about here.

Another option is to consider buying a home with a family member or good friend, which we blogged about here.

Summary

Fannie Mae recently announced a new rule which makes it easier for renters to become homeowners. Mortgage lenders can now automatically include rent payment history to help establish creditworthiness.

So if your credit report is thin or not well-established, but you have a long history of on-time rent payments, this can help you get approved for a preferred mortgage.

Take action now to apply for a home loan and get approved while mortgage rates are low.

Next Steps

When you’re ready to apply for a home loan, an experienced mortgage advisor can help you put together a solid credit profile and help you get approved. We offer homebuyers preferred rates, custom loan options, government-backed mortgages, conventional loans, and more. Connect with a local mortgage advisor to discuss your options and get approved. We’d love to help.

How Do I Qualify for a Mortgage With Student Loan Debt?

May 26, 2021
blog student loan debt

Student loan debt can cause a lot of financial stress, especially when you’re getting ready to buy a house for the first time. If you’ve got a steady job and a good handle on your monthly expenses, becoming a first-time homeowner is within reach.

So if you feel overwhelmed by your student loans, you’re not alone. A lot of first-time homebuyers wonder how they’ll qualify for a mortgage with student loan debt.

So You Want to Buy a House? Don’t Let Student Loan Debt Stop You.

This article will explain how student loans affect your home loan eligibility and how to qualify for a mortgage. Specifically, how to apply for a mortgage and get a home loan while you’re still paying off your student loan debt.

Let’s dig in.

Three Factors That Affect Your Eligibility When You Apply for a Mortgage

1. Debt to Income Ratio (DTI)

Your debt-to-income ratio impacts your buying power the most. Lenders compare your gross monthly income against your monthly debt obligations to determine how much you can afford to borrow. A DTI ratio higher than 43% can make it difficult to qualify. But there are select options for borrowers with student loan debt.

2. Credit Score

A good credit score will get you a better home loan and a lower mortgage rate. But there are also special programs available for first-time homebuyers who have a lower credit score. Check out your credit report for free here.

3. Down Payment

A larger down payment can often lock in a better rate and a more affordable mortgage payment. Ask your mortgage advisor about using investment stocks, retirement funds, gift funds, or borrowing from other sources.

Home Loan Opportunities for Borrowers With Student Loan Debt

Let’s Talk About Debt-to-Income Ratios and Mortgage Applications

When you apply for a mortgage, your debt-to-income ratio directly impacts your eligibility.

Why? Lenders compare your total monthly income with your monthly debt repayments to determine how much you can afford. If your monthly debt payments are higher than 40% of your pre-tax income, it won’t be easy to qualify.

This is where student loan payments make a significant impact.

Student loan payments are automatically included in your monthly debt balance, so they directly affect how much you can afford for a home loan. Since there are different student loan repayment programs, the structure of your specific student loan payment plan can make a big difference.

First, let’s look at how debt-to-income ratios are calculated. Then you can decide whether or not it’s a smart idea to restructure your student loan debt.

How to Calculate Your Debt-to-Income Ratio (DTI)

Figuring out your debt-to-income ratio (DTI) is easy. Write down your gross monthly income, then make a list of all your recurring monthly payments.

Leave out expenses that vary each month, such as utility bills, entertainment, groceries, transportation, etc.

To calculate your DTI, combine your required monthly payments such as:

  • Monthly rent or mortgage payment
  • Student loan payment
  • Minimum credit card payment
  • Monthly car payment
  • Any court-ordered payments (child support, back taxes, etc.)

Example: Calculating Your Debt-to-Income Ratio with Student Loans

For example, if your gross monthly income is $6,000, then 43% would be $2,580. This is the maximum amount a lender would approve for a monthly mortgage payment for a conventional loan.

Next, it’s time to subtract your monthly debt repayments. For example:

  • Monthly car payment = $200
  • Credit card payment = $135
  • Student loan payment = $250

In this scenario, your monthly debt repayment would be $585. From the lender’s perspective, this means you have $1,995 available to make a monthly mortgage payment ($2,580 – $585 = $1,995.)

Note that your new monthly payment will need to cover your mortgage payment, homeowner’s insurance, property taxes, and mortgage insurance if required.

How Different Student Loan Repayment Programs Affect Your Mortgage Application

Restructuring your student loans can help lower your debt-to-income ratio and be a better option than paying off your student loans.

Why? To apply for a mortgage, you’ll want to have a down payment ready as well as emergency funds. So you don’t want to deplete your savings to pay off your student loans.

If your monthly student loan payment is high, you might consider restructuring your student loan debt so that you can lower your monthly payment. This will help lower your DTI.

Contact the institution that handles your student loan debt and ask about the following options:

  • standard repayment plan
  • deferred student loan
  • income-driven payment plan
  • graduated payment plan

Takeaway: Don’t Let Student Loans Keep You From Buying a House

Buying your first home might be closer than you think, even while you’re paying off student loans. And several loan programs can work to your advantage, especially as a first-time homebuyer.

Plan for your down payment, find out your credit score and calculate your debt-to-income ratio. Once you have a clear financial picture, you can consider restructuring your student debt to lower your DTI ratio.

Next Steps

Working together early on can help navigate your best options. If you’d like to understand how your student loans will impact your mortgage application, let’s connect. We’d love to help.