Everyone has big dreams after earning a college diploma. However, many who actually graduate end up with hefty student loan debt, and many times that debt can become a big deterrent to qualifying for a mortgage.
According to the America Student Assistance (ASA), Americans now have more than 1.4 trillion in student debt. The average amount of student-loan debt by a 2017 graduate is more than $37,000.
Despite having debt, it’s still possible not only to get approved for a mortgage, but to afford monthly payments while still paying off college debt. In fact, plenty of Americans do it every year.
However, student loan debt has different impacts on home buying ability. Here are some impacts of student loans:
Student debt affecting graduates and parents’ lives
“Student debt is affecting multiple generations,” says Allesandra Lanza, director of communications at the ASA in Boston, a non-profit organization that helps students secure and repay higher education financing.
She adds that these people are stressing because the bigger the debt, the longer in life they are paying them off.
“And now there is a big rise in parents taking out loans for their children to go to college. The biggest growth in student debt is coming from older Americans,” she says.
These parents take out loans for their kids for college or they co-sign for their children. Depending on their financial situation, it can deter them from actually getting a new loan for a house, car or anything else.
In a 2017 survey by the National Association of REALTORS and the ASA titled the 2017 Student Loan Debt and Housing Report, it showed that 28 percent of current homeowners with student loan debt are unable to sell their existing home and buy another property.
Also, one-third of borrowers with student loan debt between $30,000 and $50,000 and more than $70,000 expect to be delayed more than eight years from purchasing a home.
But some things have changed to help those with big student debt still get a mortgage.
“It’s changed over the last couple of years on how lenders look at student loans,” says Ashley Norwood, ASA’s consumer and regulatory advisor.
New rules for student loans
In May 2017, Fannie Mae made some big changes that can make it easier for those with student debt to finally buy a home or get a cash-out refinancing to pay off their student debt.
One of the changes is that lenders with Fannie Mae must count a borrower’s actual monthly payments for student debt. These have to be debts for federal reduced-payment plans and aren’t for private student loans. Those payments are reported to the credit bureaus.
Lenders used to have to factor in one percent of your student loan balance as your monthly payment on student loans even though you were really only paying a small portion of that, Norwood adds.
For instance, if your payments had originally been $600 a month but you had them reduced to only $150 through an income-based repayment plan, only that $150 would be used for debt-to-income (DTI) purposes. Even Fannie Mae says “the lender may qualify the borrower with a $0 payment as long as the $0 payment is associated with an income-driven repayment plan.”
Also, if some of your non-mortgage debts were being paid by your parents or someone else, like a parent, those numbers would no longer be added to your DTI figures.
Since DTI is an important factor in qualifying for a mortgage, this is an important change.
And for those with student debt, Fannie Mae made it cheaper to get cash-out refinancing to actually pay off your student debt loans. This change is meant to help parents who co-signed student loans for their kids or those who signed up for parent-plus student loan programs.
The best way to get a loan is to make sure your outgoing payments for those debts and for your new home costs is 36 percent or less of your gross income. The lower the DTI, the better off you will be, Lanza adds.
Still Pay Student Loans on Time
If you have student loans, you must be vigilant about making those payments on time, says Norwood. They do count against your credit score.
Plus, if you default on a government-backed student loan (called subsidized), or are late many times on paying it back, it could stop you from qualifying from a mortgage – especially if your mortgage is through the FHA, VA or USDA.
Your lender will check to see if you are in default on any of your government obligations, Lanza says.
If you didn’t pay back your first government-backed loan, it’s assumed you might not pay back the next loan.
“Utilize your options,” Norwood says. “A lot of people aren’t aware that they can lower their monthly payments by their income. There really are ways to have student debt and afford a mortgage.”
Student Loan Forgiveness
If you were lucky enough to get federal student loans during your college years, you might be able to qualify for one of the forgiveness programs. These forgive all or a portion of your loan balances if you meet certain specifications.
For instance, if you teach for five consecutive academic years in a low-income elementary or secondary school or educational service agency, you can get rid of $17,500 of that debt through the Teacher Loan Forgiveness.
Another of these programs, Public Service Loan Forgiveness, is available to qualifying borrowers who work in public service professions such as public defenders or teachers. The federal student aid website describes employment that is eligible for loan forgiveness.
“Just keep your student loans in good order. If you tank your credit report – such as defaulting on a federal loan, that will destroy your chances to get a mortgage,” Lanza explains. “If it vital that you stay on top of student loan payments, even if you have to get a different repayment plan.”