How Student Loans Affect Qualifying For A Mortgage?

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Eddie Knoell:                      Hello, everyone. This is the Mortgage Brothers Show, and I’m Eddie Knoell.

Tom Knoell:                        I’m Tom Knoell.

Eddie Knoell:                      Welcome, everyone. Tom and I have decided to talk about student loans and how they affect mortgages. And this comes from a question that was asked by someone in our audience, a realtor. And we thought this was a great topic.

Tom Knoell:                        And we’re not really sure why it’s so interesting because no one has student loans out there, right? No one does.

Eddie Knoell:                      Oh, yeah, it’s so rare.

Tom Knoell:                        So rare.

Eddie Knoell:                      So rare that we see student loans on credit reports.

Tom Knoell:                        Actually, yeah. Super kidding, it’s a very, very valid question and point that that realtor brought up. So we’d like to talk about that.

Eddie Knoell:                      That’s right. And everyone, Tom, his oldest daughter is now a freshman in college. So he is going to be experiencing the pain soon.

Tom Knoell:                        Yes, already have. I’m in the middle of it.

Eddie Knoell:                      Yeah. So I think that we wanna make this … I think, the topic is actually I think easy to talk about. And for those of you in the audience, if anyone has student loans, you’re gonna … Especially nowadays, I mean, we went to school about 20 years ago and we didn’t have income based repayment plans, but now we do. We see that a lot. People come in, apply for a loan, have these, let’s just say a $50,000 balance on student loans and they have these $100 a month payments. And really that’s a very low payment for that balance.

So each loan program that we have treats that student loan differently. So Tom, maybe talk about what you … Maybe go over FHA and VA, because we’re gonna talk about the big loan programs that we use most of the time, so let’s just tackle those.

Tom Knoell:                        Right, right, okay. And one of the important things, ’cause it can be a real mind twist and can actually be a mind twist for me too, ’cause there’s, if you lay it out on a matrix, the deferment versus the income based repayment program versus the actual payment. It can get a little bit complicated.

But when you step back and you look at it, typically it’s always going to be a worse case, whatever is showing on your credit report, or the one percent number. And we’ll bring that up. But if we just step back and we look at FHA and VA, that’s what you wanted me to cover?

Eddie Knoell:                      Yeah, and then I’ll cover the conventional programs.

Tom Knoell:                        Okay. So if we just look at the FHA and the VA, and you’re wondering, why is Eddie just covering conventional, I’m covering two, FHA and VA are what we call government programs. So typically they’re underwritten very similarly. There are some nuances to each, but they are considered government programs and that’s why we’re clumping them together.

But when it comes to the borrower who calls us and says, “I have an income based repayment program, I’m so excited ’cause I have zero payments even though I have $100,000 worth of student loan debt, is that okay, Tom?” And I would say, “It depends on which program you’re going with. With FHA and VA, that’s not necessarily a good thing because FHA and VA will require you to use either the actual payment on your credit report, or one percent.” So I think that’s probably one of the biggest pieces when you look at this, because so many borrowers will call in and talk about their income based repayment program.

Does that kinda cover the income based repayment piece? There was another piece on deferment. You want me to cover that right now, or do you want me to wait?

Eddie Knoell:                      Okay, sure. So there is only … So let’s go ahead and cover that with VA. I mean, if someone does have student loans that are deferred, and a lot of people do, they call in, especially when they’re newly graduated, and they say, “I have deferred student loans, so you’re not gonna count the mortgage payment against me, are you?”

Tom Knoell:                        Right. Same answer as if you had the income based repayment program. With FHA, we still have to count a one percent payment against them. When it comes to VA, VA’s a little more lenient. As long as your deferment is greater than 12 months, we can actually accept a zero on that and not have to hit you with that one percent payment.

Eddie Knoell:                      That’s right. So that’s … Okay, so real quick, if someone has income based repayment plans and they have zero payments, ’cause some people do have zero payments on those income based repayment plans, if they’re a zero or 100 bucks, if it’s less than one percent, and they’re trying to get a VA loan or an FHA, it won’t work. We’re gonna have to count one percent. And the only exception is if someone has deferred student loans more than 12 months.

Tom Knoell:                        And it’s a little opposite of [crosstalk 00:05:16] …

Eddie Knoell:                      Yeah, go ahead.

Tom Knoell:                        … a little bit opposite of what you would think. You’d think that on the FHA and VA loan, they’d be a little more lenient than conventional, but it’s the opposite. They actually hit the bar worse with that one percent required payment, even if it’s zero.

Eddie Knoell:                      That’s right. And I’ll cover that real quick. I mean, conventional financing is very lenient compared to FHA and VA. Now, I will say, they are not lenient on deferred student loans. If you have a deferred student loan, they’re gonna count one percent of your balance. So again, the only program that cares about deferred student loans is …

Tom Knoell:                        That’s a little surprising.

Eddie Knoell:                      … is VA, the VA loan, if it’s over 12 months. So conventional financing does not care. They will hit you with the one percent. So, they do allow you to have an income based repayment plan, and if it’s zero, they’ll count zero, $10 a month, they’ll count $10 a month. They don’t care what the balance is on the student loans. If you qualify and you show us the paperwork that shows what your payment is, we’ll count it just what the paper says.

Tom Knoell:                        So if they call in and say, “Good news, I qualify for a conventional loan, I have a deferred,” or, “I qualify for a conventional mortgage. I have $100,000 in student loans, but they’re all deferred, Eddie. What do I do? Isn’t that great news?”

Eddie Knoell:                      Okay, the first thing I tell them is, “That’s not great news. What you need to do is you need to immediately qualify for an income based repayment plan. Basically contact the loan servicers, see what you can do to get … You wanna get in repayment, because if you want a conventional loan, you have to get in repayment.”

Tom Knoell:                        Even if it’s zero.

Eddie Knoell:                      Okay, I will say, “Or we can count one percent.” If they’re in deferment, I’m just gonna count one percent if they don’t wanna get in repayment. If they don’t wanna actually call their servicer and start that repayment process, I will count one percent. And if their debt to income ratios are okay, I’ll leave it. I’ll just count one percent.

But for a lot of folks, that one percent will put their debt ratio too high, so I’m telling them, “Contact the servicer and get in repayment with maybe an income based repayment plan.”

Tom Knoell:                        Okay. Did we …

Eddie Knoell:                      And …

Tom Knoell:                        Did we leave anything out?

Eddie Knoell:                      I’m sure there’s details, and I know that everyone listening, of course replay this if this is confusing, there are some details we’re not putting in this podcast. There’s just too much, right? There’s just too much for us to talk about. But this covers I think the vast majority of scenarios. And by all means, just contact us or your loan officer whenever you have questions on student loan financing.

Tom Knoell:                        Yeah. Good. And also, I would just add real quick, we’ve been talking about student loans from kind of a reverse perspective, which is from the debt side. But when you’re looking at it on actually originating a student loan, if ever you’ve wondered how much the student loans will cost you, they typically are about one percent per month is what your payment is.

Eddie Knoell:                      Say that again, so if you’re …

Tom Knoell:                        So if you are actually in your car right now thinking about getting a student loan or going to school and you think you’re gonna graduate with $60,000 worth of student loans, you’re wondering what your monthly payment is going to be, it will likely be about one percent, maybe a smidge over.

Eddie Knoell:                      So that one percent is actually probably an accurate … a ballpark, you’re saying.

Tom Knoell:                        Yeah. It’s used on purpose. But you can also use it going forward. If you’re trying to plan, “What are my monthly payments gonna be for my student loan,” it’ll literally be probably about a percent. So $60,000 of student loans, you walk away with about a $600 monthly payment.

Eddie Knoell:                      All right. I think we’ve covered everything that everyone kinda wants to hear. I think so. And, gee, I think we did a good job.

Tom Knoell:                        Yeah, no, good job, Ed.

Eddie Knoell:                      All right. Okay, so next week we’re gonna have a new podcast. We’re gonna figure what to talk … If anyone has any suggestions, just be sure to email us. And everyone have a good week, and [crosstalk 00:09:39] …

Tom Knoell:                        Thank you, everyone. Keep those questions coming.