You feel the rush of excitement at the thought of owning your own home. You begin imagining what it would look like…The color? The style? Should you get one with a pool in the backyard for those hot summer days?
You dabble on the internet, searching for how to apply for a mortgage when it hits you… A plethora of keywords and questions pop up – “how do student loans factor into a mortgage?” Before you jump to any conclusions on whether it could affect your ability to get a mortgage, and should you apply at all, you’ll want to read this first.
The short answer is YES- student loans factor into a mortgage, BUT this is true for any existing debt. The good news is you should still consider buying a home if you are ready and for a good reason. There have been new updates in FHA loan program guidelines that may help you obtain a mortgage, even if you’ve been turned down in the past due to your student loans.
But before we dive deeper into how FHA can help lessen your chances of being turned down or turned down again, let’s start at the beginning at how do student loans factor into a mortgage.
Your Credit Score
Your credit score is one of the first things lenders will look at. When you apply for a mortgage, your lender will evaluate all your existing monthly payment requirements, including student loans, to determine whether you would be able to manage the additional monthly payment and at what risk. Depending on your situation, the lender will decide whether you qualify for the new loan and at what interest rate.
Therefore, you should consider how both your monthly student loan payment(s) and a potential mortgage payment could affect your overall credit score before you apply for a mortgage, so there are fewer surprises. You can check your credit score before applying for a mortgage.
Your Debt-to-Income Ratio
When you apply for a mortgage, lenders use your debt-to-income ratio as a metric to assess whether you would be able to manage all your debt obligations, including student loans, and make your monthly payments on the new loan. What is important to remember when calculating your debt-to-income ratio is what matters is the amount you pay each month. not the overall amount of debt you have. For example, let us assume for a moment you pay $1,200 for your mortgage, $400 for your car, and $400 for the rest of your debts each month. Your monthly debt payments would be as follows: $1,200 + $400 + $400 = $2,000. If your gross income for the month is $6,000, your debt-to-income ratio would be 33% ($2,000 divided by $6,000 = 0.33).
New FHA guidelines
Now, let’s get to the good part! Now that you are familiar with the answer to the question, how do student loans factor into a mortgage? You can consider an FHA (Federal Housing Administration) loan, especially if you have a lower credit score. The new changes affect how student loan debt is calculated, making it easier for you to access FHA loans as a potential home buyer with student loan debt.
Under the new policy, the monthly payment amount used in the debt-to-income ratio calculation is the same as your actual student loan payment (often lower) OR when the monthly payment amount is listed as zero on your actual student loan documents. If the payment on your credit report reflects $0, 0.5% of the loan balance is used to calculate your monthly payment.
Unlike the old guidelines, FHA lenders were previously required to calculate a borrower’s monthly student loan payment at 1% of the outstanding student loan balance.
Here’s a look at how it works:
Let’s say Bob owes $28,000 in student loan debt. His credit report shows that his monthly payment is $0 on his loan. The FHA lender will multiply $28,000 by 0.5% and calculate Bob’s monthly debt as $140.00 for that student loan. If calculations followed the old guidelines, the FHA lender would have multiplied $28,000 by 1% and calculated Bob’s monthly debt as $280.00. This would have significantly impacted Bob’s chance at qualifying for a higher mortgage amount.
To keep it simple, your chances of getting approved for an FHA home loan are higher than ever before. There are even other FHA solutions that can give you a lift over the mound of student loans.
Reap the benefits of these changes and start today!
We’ve braved the question, how do student loans factor into a mortgage and learned the following: Your credit score and debt-to-income ratio can play a role, but don’t let that cause your excitement of owning your next home to dwindle. Your college experience does not have to take away from starting an exciting new chapter in your life- especially when the opportunity to become a homeowner is through the roof (pun intended). Student loan debt is a factor when purchasing a new home, but with my expertise, I can help you through the entire process, showing you all the options that you qualify for. If you’re ready to become a homeowner, get in touch with me at Fairway Independent Mortgage and we’ll show you the power of the Fairway Advantage Pre-Approval Program.