The cost of your education isn't just evident in your student loan debt. No, in fact, there is an ulterior cost lurking in the mix: the possibility of being ineligible for a mortgage. If you have a deferred student loan, it usually be will be counted against your income when you apply for the big-ticket debt. If you have a student loan, or multiple student loans, in deferment you'll need to take extra precautionary steps, working closely with your lender to ensure your chances of getting approved for a mortgage.
Here are some of the obstacles a deferred student loan can impact your mortgage chances.
Credit Reporting: Many student lenders report multiple credit accounts even if you have multiple loans through one lender to finance one education degree -- since loans are applied for and disbursed on an enrollment-period basis. So your credit report will show multiple student loans with the same creditor broken down into each loan's respective payments. This is typical, and it will also likely appear that way on a financial services credit report used by your lender in conjunction with a mortgage application.
Why it's a concern: If your student loan payment appears to be more, based on how it's listed on the credit report, the lender has to go by the credit report figures when trying to qualify you for the home loan. In a case like this, it's essential to get a letter from the creditor stating what the total balance is along with each minimum payment.
Deferred Loans: Depending on the type of student loan, you can be eligible for student loan deferment if you're enrolled in school at least half-time, or if you're having an economic hardship. In this case, the mortgage type you apply for is key. For conventional financing, you will need to provide a letter from the creditor identifying what the estimated monthly payments will be as the lender will use the estimated monthly payment in determining if you fit the requirements.
Conversely, a government-insured loan type such as an FHA loan, is a bit more forgiving. If the student loan is deferred for 12 months or longer the lender does not need to account for the liability when qualifying you for the mortgage. The key here is it has to be a 12-month deferment on that the payment obligation associated with the student loan(s).
Why it's a concern: A student loan could become very problematic if you try to qualify for the maximum loan size. Do your homework, erring on the side of caution by proactively obtaining an estimated payment letter from the creditor for any student loan account in deferment.
Deferred, but Unable to Estimate Payments: Having difficulty in procuring an estimated payment letter from a creditor for the student loan? The lender will still have to account for the liability, so they will instead use a 5 percent payment factor.
Why it's a concern: A 5 percent payment factor is 5 percent of the principle balance of the student loan, factored monthly! Ninety-nine percent of the time this payment is substantially higher than the minimum monthly payment the student loan obligation would otherwise be. This results in the borrower needing to show more income to qualify, or reducing the mortgage amount and purchase price.
Why Deferred Student Loans Are the Wildcard: Student loans negatively affect your borrowing potential -- as they are liability, counted against your income when calculating your ability to make a potential house payment. When you apply for a mortgage, lenders qualify you by taking your monthly pretax income divided by your current payment liabilities and proposed housing payment. This is known in the lending world as a DTI (the debt-to-income ratio), sometimes also called a payment-to-income ratio.
Reducing the Deferred Student Loan Burden: Looking for a mortgage? If you have a student loan, then take heed.
- Consider getting an additional co-signer for the mortgage (do so carefully, as that carries its risks) -- this can give you more income to offset the liability, and increases borrowing chances.
- Pay off the student loan entirely. This depends on what the minimum payment is and how much of that payment is affecting your qualifying numbers -- only your mortgage professional can answer this.
- Consolidate the student loans. If you haven't done so already, consolidating the student loans into one low minimum monthly payment encompassing all of the debt can also improve your chances of qualifying.
- Buy less house. This is easier said than done if you're already in contract to buy a home. It's best to handle this upfront when you're getting pre-approved to initiate the house hunt process.
- Put more money down. By borrowing less, the proposed monthly payment drops and can make the numbers work in your favor whether you're buying or remortgaging a home.
Depending on how much mortgage you are trying to qualify for, a deferred student loan may not adversely affect your qualifying chances, as long as your monthly debts (including the proposed mortgage payment) are not more than 40 percent of your income. Lenders may allow up to 45 percent of your income as the maximum debt ratio for both conventional and FHA mortgages types. By getting qualified with 40 percent or less in payment expenses, you're on the right track to successfully getting your new home loan.