The long awaited graduation from college is finally over and it is time to move on. All of that hard work has finally paid off as you begin a new path of life into the world of employment. The job is found, the money seems sufficient and you are on your way. Time flies by and before you know it, you are ready to purchase your first home and take on another loan. Have you prepared yourself for this financial adventure? You will soon find out if student loan issues crop up when applying for a mortgage.
Getting a student loan, or multiple student loans, is not difficult for most students. There is plenty of information available for students online and throughout college offices. In fact, with each year of college, students take on more student loan debt. It has become a way of life and the price of higher education that can last for years as students continue to seek the highest of degrees.
So what does this have to do with getting a mortgage? It’s all about risk and qualifying for the loan. In the past, lenders were able to ignore the debt owed on student loans if the loans were in deferment for at least three years. Deferment is common while still attending school, but also occurs for a period of time after graduation as this gives the student time to find a job and get settled on their own. However, lenders are no longer able to ignore deferred student loans. They are now an important part of the debt to income ratio of the mortgage application.
There are several steps that borrowers can take in order to lessen the credit burden of student loans when applying for a mortgage. When the lender looks at a credit report that has student loans, it is almost unbelievable at how many times the same student loan will appear. The lender usually will request that the credit agency correct the duplicates. However, there may still be a list of loans that remain on the report. Each one of these will be counted as debt that the borrower is carrying, even if the loan is in deferment. When applying for a mortgage, consolidating student loans will most likely reduce the monthly payment that is due as compared to carrying several loans. One lower monthly payment for student loans may have a positive result on the debt to income ratios.
Even FHA and VA mortgages have restrictions regarding student loans. These government insured mortgages require that if the student loan is scheduled to start or become due within 12 months of the mortgage closing, they must be included in the debt to income ratio. In order to be omitted from DTI ratios, the borrower must provide the lender with a written statement showing that the debt will be deferred beyond the 12 month period.
Keeping monthly student loan payments up to date is a very important part of your credit profile. For a multitude of reasons, many people have not paid their student loan debt on time, thus, putting it in default. When applying for an FHA, VA or USDA mortgage, the lender is required to pull a Federal CAIVRS report (Credit Alert Verification Reporting System) which will tell them if the borrower has neglected to pay any government backed loans. There is no getting around non-payment of debt owed to the government.
If at all possible, any borrower who has student loans and plans to purchase a home should try to save as much as possible for the down payment. With a higher down payment towards the purchase, the amount of risk for the lender is reduced. Since it is difficult to reduce the student loan debt which may take years to pay off, it is important to keep other debt at a minimum. This will keep the debt to income ratio down and hopefully within the lender’s limits. Make sure to pay all debt obligations on time which will produce a better credit score despite the student loans.
Many former college students have lived through the frustration of these issues. Some have come succeeded in getting the mortgage and some have not. However, no one should let these issues stop them from owning a home without giving it their best shot. With some work involved, they may be surprised at the outcome.