Do Student Loans Affect a Mortgage Application?
Many college graduates enter the market for a new home shortly after finishing school. With a degree in hand and job opportunities knocking on the door, many have to travel away from home for work. The convenience of a short commute, the security of a stable income and the value of homeownership make it a great time in their lives to consider buying. There’s just one problem–those whopping student loans hanging over their heads.
If you are one of these recent (or not so recent) graduates looking to buy a house, and have found that student loan debt is holding you back, don’t worry. There are several ways to get into your dream home even if your credit report shows student loan debt.
Pay your loans off
I know, pretty obvious, right? But I don’t mean paying off all of your student loans. Many borrowers use a portion of their down payment to pay off one or two of the many school loans they have. This allows lenders to exclude those payments when factoring debt-to-income ratios.
While a portion of your student loan debt will still be used in calculating your debt-to-income ratios, you can work with a mortgage specialist to find the sweet spot of paying down enough debt to get a mortgage while still having enough money for a downpayment.
Add a co-borrower
With FHA mortgages, you can add a non-occupant co-borrower for income support. This means you can add a relative who does not have as much debt and has the income to help improve your joint debt-to-income ratio. This option requires adding that individual to your mortgage and your deed.
However, you can remove the co-borrower down the road through refinancing when your student loan debts are paid off or your salary has increased. And unlike traditional co-borrowers who need to show they will be living in the house, this person is solely there to help support the income. So if your relative lives in California, they can still help you get a mortgage in Michigan.
Get it deferred
This option is a bit trickier than the others. You can generally only defer student loans for 12 months, and to have them excluded from your debt-to-income ratios, student loan servicers need to show that no payments are due for at least 12 months. So, you need to time the deferral just right to make it work. I have seen it work, but it takes a lot of planning and a little bit of luck for it all to report correctly.
Go back to school
This option is not for everyone, but if you are planning to go back to school for an advanced degree, your loans will be deferred for the length of time you plan to attend school. So, if you are going back for a two-year MBA or a JD at night while you have a full-time income, we can usually exclude all student loans since you are in a deferment period.
So, do student loans affect a mortgage application? The short answer is “yes.” But there are a number of different ways to get yourself into the home you want, even if you have student loans in your name.
As a qualified mortgage specialist with over a decade in the industry, I work one-on-one with all of my clients to get them into a home. So if you have any questions about the process, please contact me at 248.653.2463 and I will go over your specific situation with you.
Do you have any additional tips on preventing student loans from being a home-buying impediment? Or, have you faced significant challenges getting your loan application accepted? Let us know about your experience below.
