Common Sen$e: Qualifying for a Mortgage with Student Loans

Art Wood

Most folks who have talked to a mortgage professional know that the two biggest stumbling blocks to getting a mortgage are being selfemployed and student loans.

Things have changed a lot over the last ten years. When I first got into the business, if your student loan was in forbearance for at least twelve months from the closing of the loan, you didn’t have to count any payment against the borrower. That was great for the borrower but not necessarily a smart lending practice for the mortgage companies. The borrower was eventually going to have to pay back the student loan, and might not be able to afford the student loans and the mortgage.

Things have changed for both conventional (Fannie Mae and Freddie Mac) and FHA loans. Basically, the overarching guideline was that you had to use 1% of your student loan balance as a payment to count against your debt to income. So, if you owed $50,000 in student loans, then you had to count $500 per month against you. That is like having an extra car payment. I have had clients with excess of $150,000 in student loans that make $60,000. Having to count $1,500 against their debt to income was a killer.

Here is where things get interesting: conventional loans made a clarification. If you were in an income-based repayment plan, then they would use that payment towards your debt to income. That guideline has made homeownership a reality for a lot of my clients. They may owe $100,000 in student loans, but they have gone through the process with their student loan company of reviewing income and determining what they can afford. Their payment could be as low as $0, but realistically let’s say $100. It is a lot easier to qualify for a mortgage with a $100/month debt vs. a $1,000/month debt. I like this guideline because, in theory, their student loan payment won’t go up unless they make more money, so it keeps everything balanced. FHA just changed their guidelines to more closely align with conventional loan programs and it has been a game changer. Now, if you are applying for an FHA loan, they will use the income-based repayment payment or ½% of the total balance, so if you owe $50,000 in student loans, then the maximum that would be counted against you would be $250/month.

This is very basic information on how student loans can affect mortgage applications. As I say with most of my articles, if you have any questions or want a deeper discussion on your particular situation, call me or your favorite mortgage professional and have a conversation about how the new FHA guidelines may help you. Things are always changing in the mortgage world, and this change will be monumental for mortgage clients!

Art Wood (NMLS #118234) is the branch manager of the Art Wood Mortgage Team of Goldwater Bank, located at 2341 Main Street in downtown Tucker. “Tucker’s Mortgage Guy” for fifteen years, he is a former Tucker Tiger (Class of ’92), and co-founder and organizer of Taste of Tucker. Family guy, community guy, and definitely not your typical mortgage guy - it’s all that he does that makes Art Wood who he is. Contact him at 678.534.5834 or art.wood@goldwaterbank.com.