Will Your Student Loan Debt Get In the Way of Getting a Mortgage?
For millennials who are dealing with a significant loan debt and still eager to buy their first home, if you are one of them or if you know someone who is on the same boat, there will be more challenges to face right before you realize your dream of homeownership.
Student Loans May Affect Mortgage Eligibility
FHA is the most popular choice for many first time home buyers because not only does it allow low down payment, the credit criteria is more lenient. However, with the coming changes in the FHA mortgage underwriting rules, clients with student loan debt will be affected. Currently, clients who had their student loan payment deferred for at least 12 months could exclude this debt in their debt-to-income ratio. Come June 30th, it won’t be the case.
For FHA case numbers assigned on or after June 30, 2016, there will be significant changes to current guidelines. For FHA borrowers with student loans, underwriters will no longer be able to exclude the student loan payments from debt ratios. If you have a large student loan debt this can pose a problem because it can tip your monthly debt-to-income ratio and make it difficult to qualify for a loan.
Assuming your gross monthly income is $3,000 and your recurring monthly debt—student loan, auto loan, and credit card payments—is $700, your Debt-To-Income ratio is 23 percent. If you apply for a mortgage with a monthly payment of $900, your DTI ratio climbs to 53 percent. Your chances of getting approved for a loan are slim as most lenders will want to see a DTI ratio of 45 percent or lower.
Tips For Reducing Your Debt
Without a doubt, student loan can be a road block to your goal of homeownership, but don’t let your debts get in the way of getting a mortgage. To know where you stand, calculate your DTI by taking your monthly debt payments and dividing them by your gross income before taxes. If you have $1,800 of monthly debt and $4,000 of gross income you would have a debt to income ratio of 45 percent ($1,800/$4,000 = 45%). Don’t forget to add the property mortgage payment against your debt to income ratio. The DTI will generally be the deciding factor on how large of a loan you can qualify for.
If you have a high DTI there are ways to reduce your debt-to-income ratio. The early you start the better.
If you have a lot of credit card debt, car loans and other debt, it is best to pay off one at a time as quickly as possible. Once they disappear off your credit, it will stop affecting your DTI. Pay off those with lowest balances first, that way you can quickly lower your monthly debt service.
Reduce your living expenses and save the money. Cut back on trips, reduce your daily visits to the coffee shop or diners. By saving more money, you will have more to put down on your new home. It can be really helpful to make a conscious effort to avoid going further into debt.
It is also helpful if you can find a way to augment your income. Perhaps finding a part time job or working as a freelancer in your spare time? You could also work more hours at your primary job.
There is no easy or fast way to reduce your DTI, it usually takes making more money or lowering your monthly debt payments. If you find yourself with a high DTI, talk to your lender and make sure they are figuring everything correctly then focus on reducing your monthly debt payments.
Got a student loan? Need to buy a home soon?
Contact the J Michael Manley Team to find out how much home you can afford in the greater Greenville area before this FHA loan program changes go into effect. We’ll put you in touch with a trusted lender who will get your paperwork done quickly before June 30th.