Will student loan debt kill my chance to buy a house?

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Any significant debt is a potential barrier to home ownership, but there is one type that weighs on many potential buyers in particular: student loan debt.

According to May 2021 Census data, 43 million Americans are in debt on student loans – that’s one in eight Americans. And, according to the Federal Reserve, student loan borrowers in the United States have a total of $ 1.74 trillion in federal and private student loan debt as of the first quarter of 2021.

With interest rates at historic lows, many hopeful buyers are considering entering the market. But those with student loan arrears may wonder if this might affect their ability to get a mortgage.

How Student Loan Debt Affects Buyers

According to the National Association of Realtors’ 2020 Home Buyer and Seller Trends Report, 24% of all home buyers reported having student loan debt. Of those with outstanding student loans, 46% were between the ages of 22 and 29, 38% were between the ages of 30 and 39, and 23% were between the ages of 40 and 54.

Those with debts – including student loans and other forms such as credit card loans, car loans, etc. – say that “debt has hampered their ability to defer a down payment for an average of four years and arose largely from – for student loan arrears “.

While you don’t need to be 100% free of debt to qualify for a mortgage, lenders do look at your debt-to-income ratio (DTI) when considering you for a loan. Your DTI is the total amount of your debt compared to your total income. In general, experts say you want to aim for a DTI of around 36% or less, but some lending programs allow ratios between 45% and 50%, depending on offsetting factors such as credit rating and / or down payment.

For example, if you pay $ 150 for a car loan, $ 125 for the minimum credit card payments, and $ 250 for a student loan each month – and are hoping to buy a home with a potential mortgage loan of $ 1,200 – your total monthly debt will be $ 1,725. … If your gross monthly income is $ 5,000, then your DTI will be 35% ($ 1,725 ​​/ $ 5,000).

It is important to note that if your student loan is on hold, it will still count towards your DTI. Typically, most lenders use 1 percent of the total deferred loan to determine the monthly payment, but this depends on the loan program. Thus, if the borrower pays $ 80 a month on a $ 100,000 deferred loan, the loan program may require the lender to consider 1% or $ 1,000 in DTI instead of $ 80.

So, will your student loan debt kill your chance of getting a mortgage? Aron Clarke, vice president and senior mortgage banker at Dart Bank, says like most financial questions, there is no one-size-fits-all answer.

“Whether your loan debt will disqualify you or not depends a lot on the loan program you are trying to qualify for, because each one evaluates student loan debt differently,” he said. “Even with conventional products, student loans are treated differently. Currently, I would say that FHA is probably the most strict and Freddie Mac is the most lenient, but again, this is all situational. “

And there may be niche products for certain professions. Physician loans are probably the most well-known profession-specific program. According to the Association of American Medical Colleges, in 2020, 73% of medical graduates had student loan arrears, with an average of $ 200,000. In addition to their high debt burden, new doctors often have no established work experience and usually have little savings due to the modest salaries of residents. This makes it difficult or impossible for them to obtain a traditional mortgage.

However, some lenders discount this unique situation by offering specialty products. Dart Bank, for example, offers a doctor loan that includes a zero down payment for loans up to $ 500,000 – no private mortgage insurance – and if the borrower has deferred student loan debt, it is not included in the DTI.

How can I get more information?

While all the news about the rise in student loan debt can be discouraging, keep in mind that this is just one of the components considered in your mortgage application. Lenders look at many factors such as gross monthly income, credit history and rating, equity position (or down payment), time at work and assets to name just a few.

“I think a lot of people assume that student loan debt automatically disqualifies them from a mortgage, but more often than not, we can get the borrowers to approve,” Clark said. “Even if you are not eligible now, we can discuss steps that will lead you to a place where you might be able to get approval in the near future.”

A list of local professional lenders can be found on the Greater-Lansing® REALTOR Association website at www.lansing-realestate.com.

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