Tuesday, March 6, 2018

Student loans and your Kentucky mortgage loan approval in 2018 for USDA, Fannie Mae, FHA, VA and Rural Housing

Student loans and your mortgage | New Hampshire: You may have heard of Fannie Mae and Freddie Mac. These are government-sponsored enterprises (GSE) that securitize your basic conventional mortgages.

If you are getting a mortgage in 2018 in Kentucky, be prepared for the right mortgage program so you can get a mortgage pre-approval with outstanding student loan debts.

Fannie Mae is going to be your best bet for a mortgage pre-approval because they will take the income based repayment payment on the credit report or from the credit servicer, to qualify you for a mortgage loan approval.

USDA and FHA will take 1% of the outstanding loan balance no matter if it's in an income-based repayment plan, deferred, or in forbearance. If you can prove the monthly student loan payment is fixed for life of loan, with no adjustments, they will take that payment.

Despite their many similarities, their guidance on how to qualify a borrower with student loans differ significantly. In addition to conventional GSEs, there are also government loan options such as FHA, Rural Housing and VA loans, which also offer different stances on how to qualify borrowers with outstanding student loans.

The repayment status of a buyer’s student loan and the mortgage program selected will greatly affect how much the buyer qualifies for.

Income-based repayment for FHA, VA, USDA Loans In Kentucky

If a student loan is being repaid under an income-based repayment plan then Fannie Mae and/or VA guidelines will use the IBR payment as the monthly payment. Freddie Mac guidelines (just changed in Jan 2018) now require the lender to use a payment equal to 0.5 percent of the outstanding balance (or the actual payment; whichever is greater). 

The least favorable underwriting is with FHA and RD loans, which require the lender to use a payment equal to 1 percent of the outstanding balance as the payment (when the loan is in an income-based repayment plan). This can make a huge difference on what a buyer can qualify for.

Deferred student loans for FHA, VA, USDA and Fannie Mae in Kentucky

If a student loan is deferred, Fannie Mae, Freddie Mac, FHA and RD mortgage loans require the lender to use a payment equal to 1 percent of the outstanding balance as the payment. Fannie Mae will allow a calculated payment to be used if it can be documented via the loan terms what the fully amortizing fixed payment will be once the student loan comes out of deferment. VA mortgage loans say that if there is written evidence the student loan will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered. 

If the student loan will come out of deferment in less than a year from closing, then the lender must calculate a payment by multiplying the balance of the student loan times 5 percent and divide by 12.

Loans paid by another

If a student loan was co-signed by another and it can be documented that the other person has made all payments in the past 12 months, then FHA says you can exclude the payment when qualifying the borrower. With Fannie Mae and Freddie Mac, the person making the payments does not need to be a co-signer on the loan but it must be documented that the other person has made all payments (on time) in the past 12 months. 

Student loan forgiveness

The student loan can be excluded if the loan is currently in deferment or forbearance and the full balance of the student loan will be forgiven, canceled or discharged or if there is an employment-contingent repayment program paid at the end of the deferment or forbearance period. 

The borrower must show they current meet the requirements for forgiveness or cancellation or employment repayment and there are no circumstances that will make the borrower ineligible in the future

How student loans affect the mortgage process
Student loans by themselves cannot prevent you from getting a mortgage. The effect of the student loans on your debt-to-income ratio is the key deciding factor.
When you go to a lender seeking a home loan, they are going to look at your front and back-end ratios, your credit history, your assets, and how large of a down payment you have available.
Remember, your back-end ratio considers all of your monthly debt payments. This includes your student loan payments, car payments, credit card, and personal loan payments. If you have high monthly student loan payments but no other debt, you have a decent income, and you’re looking for a reasonably-priced home, you will most likely be fine when you apply for a home loan. (If you’re not sure, however, crunch the numbers yourself.)
If, however, those debts push you past the 41 percent debt-to-income threshold, then yes, your student loans may prevent you from qualifying for a home loan.

Your lender is going to look at both your front-end and back-end debt-to-income ratio (DTI) to determine the amount you can afford for a mortgage loan.
Front-end ratio
A front-end ratio is also known as the housing ratio. This ratio is found by dividing your projected monthly mortgage payments by your gross monthly income (your income before taxes).

Your projected mortgage payment will include the costs of the principal, taxes, insurance, and interest payments, collectively known as PITI.
For example:
  • You earn $50,000, which is $4,166 per month
  • Your PITI comes to $1,200 per month
  • $1,200 / $4,166 = 0.28, or a front-end ratio of 28 percent
Your lender will set the terms of the limit for conventional loans. Depending on the lender, expect a limit that ranges from 28 percent to 36 percent for the front-end ratio.
FHA loans (as of 2015) allow for a maximum of a 31 percent front-end limit.
Back-end ratio
The back-end ratio accounts for all of your debt obligations in comparison to your income. The lender will find this ratio by adding your monthly debt payments and then dividing that number by your gross monthly income.
These debt payments include the PITI on your mortgage, child support, credit card minimum payments, and — yes — student loans.
Here’s an example:
  • You still earn $50,000, or $4,166 per month
  • Your PITI is still $1,200 per month
  • You have a small credit card balance with a $50 per month minimum payment
  • You have a student loan with a $375 per month minimum payment
What’s your back-end ratio?
  • Your monthly debt payments come to $1,625
  • $1,625/$4,166 = 0.39, or 39 percent
Here’s the rub: Typically, conventional lenders prefer to see a back-end ratio under 36 percent. If you take out an FHA-backed loan, the highest back-end ratio you can hold is 41 percent.
In this example above, you could qualify for an FHA loan, but perhaps not a conventional loan. This illustrates how student loans (and other debt) can interfere with your ability to qualify for a mortgage.
Don’t worry, though. There are other options.
  • Some lenders will allow you to hold a back-end ratio that’s as high as 50 percent if you have great credit. This is uncommon, but possible.
  • If you have other loans with small balances (like the small credit card balance in the example above), wiping out this loan in its entirety could put you over the edge.
  • You could also look for a less-expensive house with lower PITI.


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Joel Lobb
Mortgage Loan Officer
Individual NMLS ID #57916

American Mortgage Solutions, Inc.
Company NMLS ID #1364

Text/call:      502-905-3708
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