Posted: 2017-04-19 | Author: Richard Simon
Did you know the most recent reports indicate that 44.2 million Americans have student debt equaling a total of $1.41 trillion? With an average monthly payment of $351? Now that average $351 per month may not seem too bad but this isn’t always the case when purchasing a home.
First off VA Loans are the one and ONLY loan that will allow you to have deferred student loans IF you can document they will be deferred for a minimum of 12 months from the date your loan funds and records. If you cannot document that your student loans won’t be deferred for a minimum of 12 months; your loan officer will then use what’s current on your credit report IF you have a statement from your student loan lender stating what the payment is going to be or if you have a copy of the installment loan agreement (this DOES include IBR). If you can’t document any of those your lender will then calculate 1% of the student loan balance and use that as a monthly debt.
For USDA or FHA Loans if your loan is reporting on your credit BUT it is an IBR, Graduated Plan, Adjustable Rate, Interest only or a Deferred then your lender will go with whichever is greater the 1% or the monthly payment shown on your credit report.
Fannie Mae guidelines will calculate 1% of the remaining balance on your student loans and use that in your DTI. If you are set up on a fully amortizing repayment plan the lender will have to obtain proof directly from the student loan provider to use that payment instead. Another option is the lender may use the Fannie Mae table that is based on the allowable balance in a certain payoff period and the current interest rates for student loans.
Freddie Mac on the other hand if your student loan is an installment and you have less than 10 months to pay on it, then it will NOT be counted against you. Although if this isn’t the case the lender will have to obtain a copy of the original student loan agreement that discloses what the payment will be when it is at full repayment status and it must be the same for more than 12 months from the time your loan funds and records just like VA. Just like all other loans if none of these stipulations can be met your loan officer will use the 1% of your remaining loan balance in your DTI ratio.
DTI is calculated by using the following equation
Mortgage + ALL other debt (car payment, credit cards, student loans, etc.) / gross monthly income = DTI
Ex: Mortgage $1,800; Car Payment $330; Student Loans $450; Credit cards $25= $2,605
Gross Monthly Income= $6,800 $2,605 / $6,800= 38% DTI
1% Rule Ex: Student Loan Balance= $58,000 Monthly payment would be calculated at $580.
Working with a true mortgage professional who knows the guidelines inside and out can make all the difference between purchasing a home and getting a loan denial. Have any other questions? Call 480-649-3825 to speak with an AZ Lending Expert today.