First-time buyers are usually worried about getting a mortgage when they still have student debt. This makes senses because having student debt may be a reason why the lender will deny your mortgage. However, it is not impossible to get a mortgage having student debt, so today Sunwestmpg will explain how to get a mortgage having student debt.
How does student debt affect the process of getting a mortgage?
When a lender considers a person to give him a mortgage, they will study their ability to do the monthly payments in the future so they avoid as much as they can having people who default on their loans.
Besides other aspects, you lender will take into consideration your front-end and back-end debt-to-income-ratio or DTI. This way, they will know if you can afford the monthly payments.
Having student loans may be an obstacle if the lender thinks you won’t be able to do both payments.
How is DTI calculated?
The front-end ratio (housing ratio) is calculated by dividing your projected monthly mortgage payments (considering cost of the principal, insurance, taxes, etc.) by your gross monthly income (before taxes). The percentage that results will be your front-end ratio and limits may go from 28 to 36.
The back-end ratio refers to your debt obligations compared to your income. This is were student debt may interfere as it could rise the ratio a lot. It is calculated by adding all your monthly debt payments (mortgage, credit card minimum payments, student loans, etc.) and dividing the result by your gross monthly income.
The percentage that results will be your back-end ratio and conventional lenders usually have a limit of 36, but FHA loans have a limit of 41. This can be a problem because with student loans this ratio is usually above 36, interfering with the process of getting a conventional loan.
What should I do to have more chances of getting a mortgage with student debt?
Remember there are other aspects that are considered by the lender when getting a mortgage.
Making a bigger down payment may help you, especially if it is at least 20%. Having a great credit score will also help you, making your student debt less important.
Having a high income and a good employment history (being for at least two years with the same employer) are aspects that will help a lot, so the lender sees that you are stable at work.
Additionally, if you don’t have any other important debts, like car payments, it is possible that student loans do not affect your back-end ratio as much as you think.
New Fannie Mae rules
In 2017, Fannie Mae established three new features that could make the task of getting a mortgage with student debt easier.
- Changes were made in the way lenders calculate loan payments for those who have Income-Driven Repayment Plans. Before lenders used 1% of the fully amortizing repayment amount, but now they can use the existing payment so they calculate it with what they are actually paying.
- They will consider if student loans are paid by others, because sometimes parents or even employers are the ones paying the student loans. In this case the person will have to provide documentation that shows this has been happening for the last 12 months and the loan will be excluded from the ratio calculation.
- It was created a new loan cash-out program where people will be able to refinance their mortgage if they have enough equity, so they can include funds to repay a part or all their student loans.