Students and graduates looking to purchase a home have quickly found that it is difficult, especially when there is a student loan payment looming overhead. Student loans do affect how much you will be approved for when it comes time to apply for a mortgage and also how soon you can save money for your down payment.
But, those are not the only two things you need to worry about.
If you are thinking about applying for a USDA loan, then you need to know that they will take one percent of your balance of your student loans into account when they are figuring out your debt to income ratio. The loan balances that are taken into consideration are balances that fall under the following:
- Deferred loans under an income-based plan
- Deferred loans under an adjustable repayment plan
- Loans under a standard, nonadjustable plan
Many first time homebuyers choose an FHA loan because it is buyer friendly and it does not usually require homebuyers to put down as large of a down payment on their home. In addition, the lender usually offers a lower interest rate, which is lucrative to many new homebuyers.
When it comes to the new underwriting laws, it may not be as easy to obtain the low down payment or the small interest rate. In previous years, students and graduates were allowed to exclude student loans from their income and debt report IF the student loans were deferred; however, this has now changed.
The lenders are now looking at your overall income compared to your overall monthly debts. What happens is they compare the two numbers to determine whether or not you can easily afford all of your debt payments in addition to a mortgage. This number will allow the lender to decide whether or not you may struggle to make a mortgage payment.
Typically, a lender is looking for your debt to income ratio to be at about 43 percent, but sometimes, they allow you to go up to 50 percent.
Students and graduates will now have to include this deferred debt into their debt to income ratio report, which may disqualify them for the loan.
When it comes to VA loans, nothing has really changed. Students and graduates will still be allowed to exclude loan debt from their debt to income report as long as the debt is in a qualified 18 to 24-month deferment at the time that the mortgage loan closes.
While these changes may not hurt students and graduates with small amounts of debt, the changes will definitely hurt those with larger amounts of debt.
[Interested in this topic? Check this out: FHA Mortgage Guidelines on Student Loans Altered]