Episode 61, Segment 3: How Student Loans Affect Your Mortgage Payments
Lenders are now seeing more clients than ever with a ton of student loan debt. So how does this affect your mortgage payments or the process of applying?
When it comes to student loans, John and Andrew both agree: The numbers of applicants with student loan debt is higher than they've ever seen.
"It seems like every other application we pull has student loan debt," John says. Andrew speculated that up to 80% of his applicants have student loans.
So what does this mean if you're trying to buy a house?
"In this market, the price of housing has gotten very expensive, so people who can buy usually buy right at the edge of what they qualify for. So it makes a big difference when we have to adjust the way we look at student loans," John says.
"About half of my borrowers are on deferment of their student loans," Andrew says. "In their mind, they're not paying for it right now, so they feel more comfortable and think they can get a mortgage with no problem. But as far as the investor's mind goes, they're thinking, 'You're going to have to start paying that student loan debt at some point."
"A few months ago, FHA came out and said that if there's not a payment associated with the student loan, you have to assign a 2% value of the payment. So if you have a $10k student loan, we have to assume you'll make a $200 payment - which is actually probably more than your real payment would be," John says.
After seeing the negative consequences of this on potential borrowers with student loans, the banking industry fought back against this and let them know it was a problem. FHA recently came back and said that if the borrowers can show they're on a payment plan and that plan is an income-based or graduated plan with a value of less than 2%, then lenders can now use that lower number.
Unfortunately, this rule means that if the borrower wants to get that lower value percentage, they will have to take their loans out of deferment in order for them to be able to use that lower number. The rule will go into effect on June 30th, so borrowers have time to mull over their decision! (For most other loan programs, the value is 1% instead of 2%, so this mostly affects FHA loans.)
"I think overall that this is a great thing for our borrowers and it's great news," John says.