If you are trying to buy a home with student loan debt, you aren’t alone. More than 40 million Americans have student loans that can make qualifying for a mortgage more challenging but not impossible. Student debt can lead to a few obstacles during the mortgage process, but there are ways to overcome the issues student loans often present. The best place to start is understanding how student debt can affect the ability to get a loan for a house for sale in Irvine, CA.
A student loan alone cannot keep you from qualifying for a mortgage, but the effect of your student debt on your debt-to-income (DTI) ratio will be a deciding factor. When you apply for a mortgage, your lender will focus on your DTI ratio, which divides your debts by your gross income.
There are two types of DTI ratios: front-end and back-end. Your lender will first use your projected mortgage payment, which includes the principal, insurance, taxes, and interest (PITI), to get your front-end ratio. If you earn $3,800 per month and your PITI is $800 per month, your front-end ratio is 21 percent ($800/$3,800). The back-end ratio accounts for all debt obligations, including student debt. If you have a monthly student loan payment of $600 and credit card debt with a minimum payment of $75, your back-end DTI is 36 percent.
In general, your DTI ratio can’t exceed 43 percent.
Your student loan debt can affect getting a mortgage in another way: whether you have made payments on time every month. Payment history is one of the biggest factors affecting your credit score, which directly impacts your ability to qualify for a home loan. It’s important to stay on top of student loan payments to avoid late payments on your credit report. If your loan is in a deferment period, the status will be reported to your credit report but it won’t affect your credit score.
Federal student loans come with many repayment options, including the ability to defer payments for a specific amount of time. In some situations, temporary deferment can be a smart choice if you are planning to buy a home because you can save more money for your down payment. However, it can work against you when it comes to qualifying for a mortgage. Even if your loan is deferred, the lender will still estimate what they expect your payments to be based on how much you owe.
New mortgage rules can also affect you if you are on an income-driven repayment plan that sets your student loan payments at an amount considered affordable for your income level and family size. According to a new rule from Fannie Mae, lenders should use the reduced payment amount, even if the payment is $0, when a loan applicant has an income-based repayment plan, as it can make qualifying for a mortgage easier.
If you’re looking at Irvine homes for sale and have student debt, don’t despair. You can still find your dream home with the help of a trusted local agent. Get in touch with OC Residential today at 714-454-6304 to see the latest listings on the market.