Do You Know How Student Loans Affect Your Ability To Obtain A Mortgage?

If you have student loans loans and are considering purchasing a home, do you know how your student loan payments can affect your ability to purchase a new home?  Many times, clients think that the best approach is to repay their student loans as quickly as possible. This strategy can sometimes hurt them when they are trying to buy a house.  For an FHA loan, the lender must use the greater of 1% of the loan amount or the actual documented loan payment.  This is a problem for those in income driven repayment plans, where their payments could be substantially less than 1% of the loan amount.  For example, if a client has $100,000 in student loans, the lender would have to use 1% of this or $1,000 per month in the debt to income calculation.  This client may only be paying $400 on their student loan on an income driven repayment plan, but the lender would use the higher amount.

For a conforming loan, the lender can use either the payment that is showing on the credit report, of if there is no payment being reported, or the payment is 0 under the income driven repayment plan,  the lender would use 1% of the outstanding student loan balance.  In this case, if the client is only paying $400 under an income driven repayment plan, and this is being shown on the credit report, the lender would use $400 instead of the $1,000 that would be used in an FHA loan.

In addition, having lower payments under an income driven repayment plan can allow the client to more easily save for a down payment.  If you are considering purchasing a home in the near future, it is important to consider how your student loan payments will affect your ability to get a mortgage. For some clients  with very high loan balances, the payment under a standard repayment plan can cause difficulty in obtaining a mortgage or being able to qualify for the amount that they need to buy the home they would like.  One strategy for some clients is to go on an income driven repayment plan initially, and once they have purchased the home, switch to a standard repayment plan to pay off the balance more quickly.  If you are considering purchasing a home and have student loan debt, please contact me to discuss your options.

About the Author

Patti Hughes is a Chicago Fee-Only Financial Planner.  Lake Life Wealth Advisory Group provides comprehensive and objective financial planning, retirement planning, and investment management to help clients organize, grow and protect their assets through life’s transitions.  She is a fiduciary, and does not sell products or earn commissions, so she truly acts in the best interests of her clients.