So you and your spouse have completed your undergraduate degrees. You both have decided that you will continue your graduate degrees while working. Each of you has an annual income of roughly $50,000. You both have good credit, and you have put aside money for a down-payment for your first home. You both decide to begin your search for home loans for students so you can buy your first home! Happy day!

When you apply with a mortgage broker, you learn that your student loans significantly impact the amount of home you can afford, even though you have no payments.  As you both have decided to continue your education, your current student loan debt will remain in deferment status. You each have about $50,000 in student loans, and together, this loan debt totals roughly $100,000. You also learn the mortgage broker does not offer specific homes loans for students. Not such a happy day anymore…

We have seen this happen numerous times. Fortunately, some rule changes have passed recently allowing lenders to qualify more families dealing with student debt. While specific home loans for students do not exist (to our knowledge), student loans should no longer strangle quite so tightly those families looking to purchase a home. Happ…ier day…?

 

Changes to Home Loans for Students

The basic idea behind the changes seems rather simple. Lenders can now use the payment information that shows up on the credit report. So… what did they use before? Prior to the changes to home loans for students, lenders had to calculate a payment based on the total amount of debt owed.  So, now they can use the payment actually made, instead of an arbitrary inflated number. Makes sense right?

Previously, the lender had to take 1% “of the outstanding student loan balance to calculate the potential monthly student loan payment.” For example, our couple at the beginning of the article with $100,000 in student loan debt would have a $1,000 monthly payment assigned to them. $1,000!!! That could cover a whole mortgage payment for some families! Even though the debt required no payments. That $1,000 per month lowers the amount of home they can qualify for by $150,000!! No Home For You! (Seinfeld…)

Anyway, with the changes, “the lender now can accept the student loan payment information that’s included on the borrower’s credit report.”  Meaning if you have the payments on an Income Based Repayment plan (IBR) totaling $25 per month, the lender no longer has to use the $1,000 calculated payment! That just added $145,000 back into the total amount the couple can qualify for. (Now go get that armoire from the basement! … only Seinfeld fans will understand…)

 

Parents and Home Loans for Students

Another change allows the lenders to take into account student loans paid by someone else, such as a parent. A common trend according to Bill Banfield, executive vice president of capital markets for Quicken Loans, has parents of millennials making the student loan payments. This option would require strict documentation showing the last 12 months of payments originated from the parents with zero late payments. However, with this documentation, the students and those with the student debt would qualify for a loan more easily, and for a larger amount. Wondering why parents took over the payments in the first place?

Interestingly enough, they may have intended to make those payments the entire time, and simply let the child obtain the loan.  Why, you ask? According to the article, students tend to have better loan terms than their parents with federal student loan programs.  From a 6.31% interest rate to a 3.76% interest rate, students tend to receive interest rates just over 2.5% lower! So while the parents may have not had the money to pay for tuition, room, and board, they appear to feel comfortable paying the students loans over time. And provided they paid for 12 months prior to the student applying for a home loan, these payments can help the student qualify!

 

Home Loans for Parents of Students

Finally, parents that did apply for loans to help their children attend college have some other options as well. A new cash-out refinancing option for current homeowners will allow cash taken out of the equity in the home go directly to student loans. On the surface this may seem like an amazing option, however, as with all major decisions, consult an adviser before moving on it.

In this case, parents of students may want to speak with not only a financial adviser, but a tax adviser as well. Keep in mind that both student loan interest, as well as mortgage interest have potential tax deductions. Each deduction has its own restrictions and requirements though, with student loan interest deductions dependent on annual income for instance. Also, each loan type has benefits and restrictions as well. Such as, federal student loans have deferment and forbearance options available with different hardship life events. Not to mention Income Based Repayment options. So again, make sure you speak with an adviser!

But for those families with stable employment and a higher income bracket, consolidating payments may work out in their favor. Most families that pay a mortgage tend to itemize their deductions at tax time. And if they can qualify for a lower interest rate on the mortgage, either through standard terms, or buying down points, they could end up saving money in the long run. Definitely worth at least a conversation and a little research.

 

Summary

Lenders have had a difficult time qualifying home loans for students with the previous restrictions and using calculated payments. These restrictions certainly helped at the time of implementation, reducing risk to lenders and loan servicers.  However, with all of the different changes made to student loan programs over the last 10 years, this modification of the rules seems like a logical move.

Now, mortgage brokers can use the actual payment in the credit report instead of a percentage of the total debt owed.  Together with the ability to calculate in payments made consistently by another party, those with student loan debt have a better chance of qualifying for home loans. Finally, parents that borrowed money to assist their children with paying for college can pay off those student loans using the equity in their homes if that makes sense financially.

To summarize, mortgage brokers and lenders attempting to qualify families for home loans can:

• Utilize Student Loan Payments from credit reports instead of calculated payments
• Use proven consistent payments made from other parties
• Use equity in the current home to cash-out and pay off student loan debt

Lots of options! Make sure you consult with your financial adviser! And let us know if you need a referral for a mortgage broker or lender!

 

Ready to allow us to help you find your #dreamhome?

 

http://www.floridarealtors.org/NewsAndEvents/article.cfm?p=1&id=351513