It’s 2016 and Americans are more burdened by student loan debt than ever. The average undergraduate student borrower is facing $30,000 in student loan debt, according to a report from The Institute of College Access and Success. Have you ever wondered what else you could buy for $30,000? For starters, you could buy 4,709 Chipotle burritos!
Understanding student loan repayment plans and options when getting a mortgage can be confusing. Let’s walk through the process together!
Your home loan lender wants to make sure that you can afford your mortgage payment. This is done by comparing your monthly expenses as a percentage of your monthly income. The technical term for this calculation is debt-to-income ratio or DTI. For example, say that you have gross monthly income of $5,000 and a total of $2,000 of monthly payments, including your new mortgage payment and a car payment, then your DTI would be 40%. Are you wondering what this means to you? For starters, the DTI calculation varies when you have student loans. There are many home loan programs available and not all loan programs treat student loan debt in the same way. However, as a guide, your DTI should always be between 36% and 43%.
Let’s look at how your student loan impacts the DTI. Your lender needs to know what type of student loan you have. Are you making payments or are your payments deferred? If payments are deferred, for how long? This is important because some home loan programs such as VA loans, insured by the Veteran’s Administration, exclude your student loan payments if they are deferred for at least 12 months after you obtain your home loan. So, if your student loans are deferred, then under the VA home loan program, you will be able to borrow more money. But even when student loans are deferred, other programs may calculate up to 2% of your total outstanding loan as your monthly student loan payment. In this case, you will be able to borrow less money because the payment will be included in the DTI calculation.
Understand that the rules under which mortgages are approved are there to protect you. Maintaining a good credit rating is important. When you are unable to make your payments, your credit will be damaged. That in turn will make it difficult for you to borrow money in the future. It may even impact your ability to land that dream job! Today, many companies obtain a credit report on prospective employees and may not hire someone with a poor credit history.
Not sure how creditworthy you are? Click here to get your free credit report!
So, how can you can overcome the challenge of getting a mortgage? Find the right mortgage loan originator who understands the various loan programs and how they apply to your particular situation, and will help you navigate through this process from start to finish. Also, Franklin Savings Bank’s Resource Center offers an assortment of intuitive calculators, tutorials, and tools to help you accomplish your financial goals.