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Chrisman's Corner: Home Loans and Student Debt

JMAC’s brokers know that student loans impact their borrower’s ability to qualify for a mortgage, but which loan programs are more forgiving when it comes to student loan debt?

Our experienced brokers will often direct their clients toward FHA loans. This type of loan has been around since the 1930s and has appealed to many first time homebuyers as the required down payment is now 3.5 percent. The credit qualifying criteria also tends to be more lenient and appeal to low to moderate income borrowers.

 But our brokers also know that with the recent underwriting changes to FHA mortgages, this option has become less desirable. Previously, borrowers who were deferring their loan payment could exclude this debt from their overall debt-to-income ratio, but now they are included in the DTI ratio by calculating 2 percent of the student loan amount ($200 for every $10,000 owed). This includes borrowers utilizing the income-based repayment plan with a payment of zero dollars. Borrowers with the fixed monthly payment will have those payments included in the DTI calculation.

 For those borrowers with student loan debt that qualify for a VA loan, if the debt is in an 18 to 24 month deferment at the time of closing, it will not be counted as part of the DTI ratio. In the residential lending business, many underwrite VA and FHA loans similarly, so it’s important to check to see how this debt will be calculated.

 Finally, USDA loans take into consideration 1 percent of the balance of the student loans if the loans are deferred or under an adjustable payment plan, such as income-based repayment. If loans are in the standard payment plan, then the amount will be used when calculating the DTI.

 The new Fannie Mae underwriting guidelines require that the greater of 1 percent of the student loan balance or the actual payment amount is used when determining the DTI ratio; it previously was 2 percent.

 If all this can seem complicated, you’re not alone. JMAC’s staff is well-versed in helping our brokers determine the best scenarios when a borrower has outstanding student debt.