Student loans & mortgages
Student loans can help you achieve your educational and career goals. Still, high student loan debt might affect the home-buying process. Many factors determine whether or not you qualify for a mortgage. However, they do not need to stop homeownership dreams from becoming a reality.
A DTI is a calculation lenders use to determine if an individual can afford monthly payments for a mortgage. There are two types of debt-to-income ratios: the front end and back end ratio, which play an essential role in determining whether or not someone qualifies for a loan.
A front-end ratio is also known as the housing ratio. The total cost of your monthly mortgage payments (including principal, taxes, insurance and interest, AKA PITI) should be less than or equal to 28% of your gross income.
A back-end ratio takes into account all of your debt obligations in comparison to your income. Usually, lenders find this ratio by adding monthly debt payments to your housing expenses before dividing that number by your gross monthly income. Aside from principal, taxes, insurance, and interest on your mortgage, these debt payments will include credit card minimums and student loans. Many conventional lenders, such as Fannie Mae and Freddie Mac, prefer to see a back-end ratio of under 36%. However, the highest back-end ratio one can hold tends to be around 43% with an FHA loan.
Student loans alone will not prevent you from getting a mortgage, but as mentioned above, the effect of your student loans on your debt-to-income ratio is the critical deciding factor. Pretty much everything accumulates to whether a borrower’s portfolio is loan-ready. Student loan debt is not uncommon enough in the United States to make that much difference when compared to your credit history, assets, income, and work history.
Down Payment Amount:
Another significant factor is how big of a down payment you have available. Suppose you have poor front and back-end debt-to-income ratios but have a large sum of money saved for a down payment, as well as good income for high monthly payments. In that case, the bank will most likely rule in your favor.
Today, more than two-thirds of college graduates have student debt, compared with less than 50% in the early 1990s. Back then, the average balance was $9000. It now sits at $30,000, meaning a typical monthly student loan repayment will come to roughly $400.
It might be worth considering switching to a student loan repayment plan that lowers your monthly obligation, such as the extended repayment plan or an income-driven one. In 2017, federal mortgage giant Fannie Mae made it easier for student loan borrowers to get a mortgage by allowing lenders to consider newly instated repayment plans. It would be a good idea to change your repayment plan at least a year before applying for a mortgage. It might also be helpful to know that owning a house will not impact your monthly student loan payments on an income-driven repayment plan.