How to get a mortgage, even with high student loan debt
Americans continue to have a massive amount of student loan debt, with the potential to derail many people’s hopes of buying a home.
The latest data shows that American student borrowers – a strong 45 million – owe it $1.7 trillion in student loan debt. Which makes Student loan debt is the second highest category of consumer debt, after mortgage debt, but it is more so than auto and credit card debt.
For potential homebuyers, taking on excessive student loan debt may discourage them from seeking a mortgage. This is understandable, because the idea of adding mortgage debt to student loan debt may lead some home loan lenders to decline your mortgage loan application.
Mortgage experts say that this line of reasoning is actually out of line.
“With good credit, homebuyers with student loan debt can get a mortgage,” said John Boden, strategic financial advisor at Real Estate Bees, in Suwanee, Ga. “There are several ways to deal with it, depending on the type of loan the homebuyer is considering. “.
As with most housing loans, experiences vary based on the borrower’s unique financial situation.
said Rick Bendikowski, owner of Self Directed Retirement Plans LLC, in Goodyear, Az.
For starters, most people need a FICO credit score of over 720 to get a decent mortgage rate and lower mortgage insurance.
“A FICO credit score of less than 720 typically means that you are paying higher rates and mortgage insurance premiums,” Bendikowski told TheStreet. “Getting a mortgage is much more difficult than getting a car loan or credit card. Most of the time, people apply for a car loan/credit card and get accepted or denied.”
The main problem? With a mortgage application, all personal information is reviewed and investigated. “This includes debt to income, creditworthiness, income, savings, and three years of tax returns, among other financial credentials,” Bendikowski said.
If you can’t demonstrate good credit, obtaining an income-based student loan repayment agreement can pave the way for mortgage approval.
“This means that the payment agreement is based on the income of the borrower and the terms defined at that time,” Pendykoski noted. Therefore, the mortgage lender has to abide by the repayment terms stipulated in that agreement. This is the truth, even if you are paying more on the balance each month than is due under this agreement.”
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How do you deal with student loan issues?
Also like any major loan, mortgage lenders will want to know your student loan repayment history – good or bad.
“Student loan debt is not a particular area to focus on any other type of debt, such as a credit card balance or a car payment,” said Tabitha Mazara, COO of Mortgage Bank of California (MBAC) in Manhattan Beach. , Cal. “It all goes into the same account for your credit score and how lenders view you. If you make your payments on time, that sounds fine, and if you are often late, it doesn’t.”
MBAC also closely studies a borrower’s debt-to-income ratio, which is the ratio of how much you earn versus how much you owe.
“If you have a huge student loan balance, but that is offset by a good income, you won’t be hurt,” Mazara told TheStreet. “A loan balance of around 36% or less isn’t bad – we recommend looking at several online calculators to find your number. But even if it’s high, we can find a way to work with you, so don’t give up too quickly before talking to a reputable mortgage lender. “.
Thus, having a large student debt burden does not necessarily mean that any lender will give you a mortgage loan, but it could mean paying a slightly larger amount in the interest rate.
“Keep in mind that a home is a long-term investment, and over time, and you’ve paid off your student loans, you can look for a better deal with refinancing,” Mazara said. “If you have a good education, hopefully that translates into a good career, and your earning power will only rise as student debt goes down.”
When Student Loan Debt Doesn’t Hurt
Mortgage experts say it’s relatively easy to get a mortgage even in the current high interest rate environment with a credit score of 740 or higher, a down payment of at least 5% and a salaried or full-time job.
“Borrowers with low credit scores (up to 580) may qualify for a government-backed FHA loan with a down payment of 3.5%, but they will have to provide additional proof of their ability to repay,” said Denny Ciesek, a housing and mortgage expert. Loan” in Student Loan Hero from LendingTree. “Freelance work or variable delegated income can make the approval process more difficult, as lenders have to calculate the average income over several years to ensure it is stable.”
However, as long as your student loans are not in default and you have a payment plan with a written monthly payment, it is not difficult to get a low-interest mortgage.
“Mortgage lenders are allowed to use a written repayment plan from a student loan creditor even if the payment is $0 (which is common if you are entering the job market and applying for an income-based student loan repayment plan),” Sisik said. “However, if the loans are still deferred, the lender must estimate the monthly payment based on a percentage of your student loan balances, even though you have not paid them back. This can make it difficult to qualify for a home loan, or reduce the amount you will lend. Mortgage Corporation.
“That’s why it’s a good idea to make sure you have all of your student loan repayment information in order before you apply for a mortgage,” Sisik added.