How Do Student Loans Affect Your Mortgage Application
Student loans seem to be more and more common these days. The Institute for College Access and Success (TICAS) reported in 2018 that nationally, 65% of seniors graduating from public and private nonprofit colleges had student loan debt. This data does not account for graduates of for-profit colleges, which have even higher percentage rates of student loan use. In Oregon, the schools included in the TICAS report show that 56% of 2017 graduating seniors had education debt. The average amount of student debt in Oregon for 2017 was $27,885. All of this data is specifically regarding students attending private or public four-year colleges for bachelor’s degrees. The figures increase even further for post-graduate studies.
$1.5 Trillion and Growing
Earlier this year, Forbes reported there are more than 44 million people owing a collective $1.5 trillion in student loan debt in the U.S. Student loan debt is the second highest consumer debt category, behind mortgage debt. In 2018, the Federal Reserve reported that among the approximate 30% of adults who attended college, 42% incurred at least some debt from their education. Furthermore, the Fed also reports adults under 30 who attended college took out more loans than prior generations. Educational debt is now higher than credit card debt and auto loans, and based on the data from the last few years, appears to be increasing each year.
Can I still Get a Mortgage Despite My Student Loans?
Now that you know this information about student loans, how does it affect your ability to qualify for a mortgage? Fannie Mae has three solutions that can potentially help applicants qualify for a conventional mortgage despite their student debt. Since all these solutions are available with Pacific Residential Mortgage, we want to ensure you’re aware of them.
Debts Paid By Others
If a joint debt is paid by someone else, Fannie Mae allows lenders to omit it. Therefore, if you have a cosigned student loan, and you can document someone else has made the most recent 12 months of payments on time, it doesn’t have to count against your debt ratios. The most common scenario where this guideline would apply is a parent who’s cosigned for their child’s education debt. The key to this guideline is that the person who’s making the payment must also be listed as a debtor on the account. Payments must be on time for the most recent 12 months, and you must provide documentation to prove that. What’s the benefit of omitting a debt? Most loans have specific parameters for debt ratios. If you can omit a debt, that subsequently lowers your debt ratios, and you could possibly qualify for a higher loan amount.
Student Loan Payment Calculations
The calculation used for your payment amount depends on how it shows on your credit report. Fannie Mae will use the payment amount reported on the credit report if there’s a payment showing. If the payment amount is showing but is incorrect, the lender may use the payment shown on the student loan documentation. If the credit report does not show a monthly payment, or if the payment is $0 on the credit report, there are two options.
The first option is to use 1% of the balance. The second option is more complicated, but can benefit a mortgage applicant. If the borrower is on an income-driven payment plan, the lender may obtain documentation to verify the actual monthly payment. Thus, if you’re on an income-based repayment plan (IBR), and your payment is truly $0, the lender will use a $0 payment, which will help your debt ratios. You have to provide proof your student loan is on an IBR plan with a $0 payment in order to qualify with that $0 payment. Loans in deferral or forbearance may not use a $0 payment for qualifying. The lender will use either 1% of the loan balance or the fully amortizing payment for those types of loans.
Fannie Mae Student Loan Cash-Out Refinance
For people who already own property, Fannie Mae offers another solution for student loan debt. Typically, a cash-out refinance has a higher interest rate than a rate/term or no-cash-out refinance. Fannie Mae’s Student Loan Cash-Out Refinance is unique. It allows for student loan payoff without the additional pricing adjustment that would apply to a typical cash-out refinance. This product allows for payoff of an existing first lien, plus at least one student loan. Applicants may finance their closing costs, points, and prepaid items. At closing, applicants may receive a maximum of either $2,000 or 2% of the loan amount, whichever is lower. Essentially, this is a rate/term refinance product, with the additional allowance of student loan payoffs.
A typical rate/term refinance only allows for a first mortgage payoff, thus will not permit payoff of any additional debts. As a result, rate/term refinances tend to have lower interest rates. So Fannie Mae’s Student Loan Cash-Out Refinance is an excellent solution for those wanting to refinance and pay off some of their educational debt, without the higher rate pricing of a standard cash-out transaction.
You Can Get a Mortgage Even With Student Loans
We’ve outlined the options for how you can qualify for a mortgage and still have student loan debt. These are only three from Fannie Mae’s conventional financing guidelines. There are additional options, including other available loan products. Please reach out to our Mortgage Advisors to discuss other loan products.
Do you have questions about how your student loans are affecting your mortgage eligibility? Fill out the form below or contact us today!