According to a 2021 report on EducationData.Org, 12% of the Arkansas population is carrying student loan debt. The average amount owed per individual borrower is about $33,000. Here to explain how student loans impact your ability to buy a home is Rich Allensworth with Rock Mortgage Lending.
Can student loans help or hurt your chances of getting a first-time mortgage?
Student loans are factored into the mortgage lending process just like any other type of debt. They don’t affect your ability to get a mortgage any differently than other types of debt you may have, including auto loans and credit card debt. When you apply for a mortgage, your lender will assess all of your existing monthly payment obligations, including student loans, to determine whether you would be able to manage the additional monthly payment. And, like other debts, non-timely payment can affect your credit score. So, it’s very important to pay student loans on time.
How can individuals with student loans gauge their chances of getting a mortgage?
It’s always a good idea to get pre-approved. Contact a trusted mortgage lender and start the conversation about your financial situation and your goals around financial planning and homeownership. Two main factors will heavily come into play: Your debt-to-income ratio and your overall credit score. You should consider how both your monthly student loan payment and a hypothetical mortgage payment could affect your debt-to-income ratio and overall credit score before you apply for a mortgage. In other words, if you have any existing debt, you need to be careful that you will be able to manage all your monthly payment obligations with your current income. Most lenders will not approve a mortgage if an applicant’s debt-to-income ratio exceeds 43%. Ideally, it should be at or under 36%, with the maximum for monthly mortgage-related payments under 28%, experts say. You can do this calculation before you apply for a mortgage to better understand whether you may qualify. For example, if you pay $500 a month for your auto loan, $200 a month for your student loans and want to buy a house that would have a monthly mortgage payment of $1,300, your monthly debt payments would total $2,000. If your gross monthly income is $6,000, then your debt-to-income ratio is about 33%.
How do student loans impact mortgage payment amounts?
The calculation varies a bit depending on the type of mortgage loan you opt for. Potential homebuyers can choose between a conventional mortgage or an FHA, USDA or VA loan. An FHA loan is a mortgage backed and insured by the Federal Housing Administration for people with limited savings or lower credit scores. For those considering an FHA loan, changes were announced in June that affect the way student loan debt is calculated in the debt-to-income ratio and make it easier for some potential homebuyers with student loan debt to access FHA loans. Under the old guidelines, FHA lenders were required to calculate a borrower’s monthly student loan payment at 1% of the outstanding student loan balance. Under the new policy, the monthly payment amount used in the debt-to-income ratio calculation is the same as a potential homebuyer’s actual student loan payment, which is often lower.
What should potential homebuyers who have student debt do first?
The borrower needs to contact the student loan provider and tell the representative that they are applying for a mortgage. The borrower then needs to provide the bank with the full amount of their monthly loan payment, including principal plus interest. This figure should be around 0.5% of the outstanding student loan balance which is around $500 on a $100,000 balance student loan amount, for example. The lender will need a letter confirming the monthly amount which may take a day or two for the student loan provider to send to the borrower. As always, it’s very important for potential homeowners to give their lender as much information as possible about their financial situation and any anticipated changes so that the lender can find the right products for the individual.
If someone wants to learn more about applying for a mortgage, where should they turn?
I encourage your viewers to reach out to a mortgage lender. It’s important to find a lender that you feel comfortable with because you will be giving them a lot of sensitive information. Feel free to reach out to one of our mortgage lenders at Rock Mortgage to get the conversation started.
For more information, visit www.rockmortgagelending.com or call 479.321.3355.