Did you know that student loans have the potential to hinder your ability to purchase a home? During a conversation with Ben Tritt, a loan officer with American Pacific Mortgage about student loans and those loans coming out of deferment, it became clear that student loans have the potential to cause more problems that before. Ben and I have worked on several transactions together over the years and when he speaks, I listen.
A little backstory, when you get a loan, depending on the type of loan, Conventional, FHA, VA, etc., you must have a specific debt to income ratio. For example, a Conventional loan allows you to have up to 45% of your income in debt (car payments, student loans, etc). That’s where your student loan debt comes in, especially if it has been or is currently in deferment but coming due soon.
According to Ben, in the mortgage industry, we are allowed to only count 50% of the balance of the loan against you as a payment…ie; a $20,000 student loan would only count as a $100.00 payment against the income ratios if the loan was in deferment. When these loans come out of deferment, it creates a payment on the client’s credit report that is MUCH higher than the 50% payment we would count if still in deferment. So, a client that has 3,4,5,6 student loans and qualified for a $250,0000 house, now only qualifies for a $200,000 house due to the monthly payment now reporting on the credit bureaus for his or her student loans.
Many clients, who were pre-qualified prior to their loans coming out of deferment, do not realize this and when they go under contract a credit refresh (or a new credit file) is pulled and then the income ratios are much higher due to the payment reporting for these student loans. I feel like in January 2024 many of these student loan companies that had previously allowed for the student loan to be in deferment (mainly due to Covid) are now reflecting a monthly payment and that can take a client from qualifying to not qualifying.
Example: I am working with one client that has a $130,0000 student loan she co-signed for her son, that was in deferment back in December. Once she went under contract in January that loan became payable and the $650 per month (.50%) I was counting against her ratios was now $1,330 per month. This client is having to buy down her rate and payoff two large credit cards just to qualify for the same loan she qualified for a few months ago when the loan was in deferment.
If you’re thinking about dipping your toes into the home buying market, the first thing you should do is to get pre-qualified. Make sure you speak to Ben or another loan officer of your choosing that has the experience to ask you the right questions and determine how best to handle your student loans in an effort to make a new home a reality without any student loan hiccups.
