HOW CAN STUDENT LOANS AFFECT A MORTGAGE APPROVAL?

Got student loans?

Whether you're making your payments, you're in deferment, Income-Based Repayment (IBR), or even if you're in Forbearance, student loans will have an impact on your home loan approval. How much or how little? That depends on your exact situation, but here is everything you need to know. 

Student loans can cause surprising complications when you’re financing a home---It could dramatically limit your buying power, and can even lead to a loan denial.

Speaking of surprises, did you know...

Only 1% of of Student Loan borrowers are making their normal monthly payments.

Wait a minute--WHAT?   I have to confess, I was pretty floored by this statistic, but mortgage lenders have long understood the looming issue. Congress tried to create some form of Student loan relief, but some of their solutions have created a situation where student loan holders’ balances are increasing—not decreasing—every month.  Eventually, this situation will come to a head. 

Student loans are Federally-guaranteed. They are a type of "permanent" debt that can’t simply be brushed aside, and it’s one of the few debts that you cannot include in a Bankruptcy. This type of debt can potentially take precedence over a mortgage debt---leaving some consumers with a choice of paying their student loans OR paying their mortgage. As your mortgage lender, we want you to be happy in your home and not have to make such a horrendous choice, so we are constantly keeping student loans in mind when we make lending decisions.

The Four Types of Student Loan Repayment

There are four basic types of student loan repayment: 

• REGULAR REPAYMENT – this is when you’re making your regular student loan payments
• DEFERMENT – you’re still in school, payments have been deferred until your education is complete.
• INCOME-BASED REPAYMENT (IBR) – payments are adjusted downwards to fit into your monthly income. Often you’re allowed to make less than the full payment required to paydown the loan over time. If you're not making your original payments, the unpaid interest may be adding up and will eventually be added to the loan balance and the payments recalculated at a later date. 
• FORBEARANCE – the Student Loan servicer has allowed you to temporarily pause monthly payments. This was implemented via the 2020 CARES Act, and became common in the 2020 Covid-19 Pandemic.  During forbearance, you are not required to make monthly payments; however you should be aware that the unpaid interest is not forgiven. It adds up and will eventually be added to the loan and the payments recalculated at a later date. 

How Lenders Look at Student Loans

When a lender pulls your credit, we see all of your debts, including your student loans. It looks something like this: 

If we see “$0” as your required monthly payment, or if the payment amount seems abnormally low, then we know that you’re most likely in Deferment, Forbearance, or Income-Based Repayment.  Generally speaking, lenders cannot use “$0” as a monthly payment to qualify your loan. 

Instead, we can obtain documents from your student loan servicer as to your “regular” monthly payment; or if this is not obtainable or acceptable, we can also use one of the following choices, depending on which type of new home loan you are applying for:

• 1% of the outstanding balance – This applies if you're qualifying for a Conventional Loan (via Fannie Mae), VA, Non-QM/Unconventional Loans.
• 0.5% of the outstanding balance – This applies if you're qualifying for a Conventional Loan (via Freddie Mac), FHA 
• On VA Home Loans, we can accept “0” if we can document that the student loan will be in deferment for a period of at least 1 year from the date of your new mortgage note. 

How to be prepared

Honestly, if you have student loans--not matter your repayment status---the best thing you can do to be prepared is to get Preapproved with your lender BEFORE you start shopping for homes.  A good Loan Originator can help you figure out if your student loans are going to hinder your goals.  We can also help you determine the best loan program for you.  If you're qualifying for a Conventional home loan, a seasoned Loan Originator can help you know if a Fannie Mae or Freddie Mac type Conventional loan program is the best fit for your overall financial profile.  If your lender or your Loan Originator is unsure or unwilling to discuss the difference and you have difficulties getting approved, you may need to seek financing with a more experienced lender or Loan Originator. 

If your loans are in Deferment, Forbearance or IBR, contact your student loan servicer and request documentation that outlines your regular anticipated monthly payment for your loan(s). Be sure to have this ready to provide your Loan Originator when you start your preapproval.  This will help us to make a fast determination for you and complete your preapproval even faster!

If you have student loans and you're looking at purchasing, refinancing, or getting preapproved for a mortgage home loan anywhere in the state of Florida, give us a call today at (813) 928-9610...If you have a scenario that you’d like to discuss with us, we’d love to chat.  

WRAPPING UP...

As always, if you have student loans and you're looking at purchasing, refinancing, or getting preapproved for a mortgage home loan anywhere in the state of Florida, we’d love to help.  Simply give us a call so we run some numbers for you and answer all your questions! 

You can also drop us a line HERE »

Yours in successful homeownership,

Derek Bissen
Loan Originator
NMLS#365627
Unconventional Lending Program Director