What is the relation of student debt to home purchase? It used to be that loans deferred by 3 or more years could be ignored for the sake of qualifying for a mortgage loan. Now we must include even deferred payment loans.
Let me explain how lenders approve loans from the income and expense standpoint. We start with gross monthly income, as documented by pay stubs, W2s and possibly a written Verification of Employment from the borrower’s employer. Next, we calculate the full monthly payment—principal, interest, taxes, and insurance including mortgage insurance and HOA dues, if any. That is “total housing expense.”
We add to that figure any debt payments that have 10 months or more remaining—car loans, student loans, credit card minimum payments, alimony/child support, etc. Therefore, adding that debt service total to housing gives us total debt, Dividing that number by the gross monthly income provides us with the DTI, expressed as a percentage.
Example: you have $6,500/mo gross income, a projected $2,000 per month house payment and $470 in other debt services. Your DTI is 38% (2,470 / 6,500 = .38 = 38%)
Student debt inclusion
We have to include student debt payments in the equation even when they’re deferred. If we don’t find a scheduled payment on the credit report, we can use 1% of the outstanding balance or a calculated repayment based on the interest rate and original term of the loan. That term will tend to be anywhere from 10 years to as much as 30 years, depending on the balance.
Thus, if you have $40,000 of student debt currently in deferment, and the rate is 4.5%, the term 15 years, your calculated payment would be $306. This will reduce your buying power by around $50,000 in most cases.
In conclusion, It might be hard to apply for a mortgage loan due to your student debt but there is definitely a way.
Hope this helps!
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