‘The Big Move’ is a new MarketWatch column seeking to answer questions about navigating the world of real estate.
Do you have a question about buying or selling a home? Do you know where your next move should be? Email Jacob Passy at [email protected]
I am a 58-year-old Black male with a student loan debt of $593,000. Seriously. I have 4 degrees — B.A., J.D., M.Ed., M.A. — and I’m working on my last Ed.D. I am currently employed as an educator.
I would like to buy a house but to qualify is like a pie in
the sky. I am working on a down payment
of $12,000. But any mortgage company
will tell me that they have to count 1% or .5% of my loan balance towards my debt. I would like to buy a house in July 2021. I’m currently renting for $1,390 per month.
A well-educated prospective home buyer
I’ve got good news and bad news for you. The good news is that having student debt — even nearly $600,000 in student-loan debt, as you do — does not inherently preclude someone from getting a mortgage and buying a home.
“We’re not concerned from a mortgage perspective, as to the
balance, we don’t care if it’s 100,000 or a million dollars, all we care is
about the obligation on a monthly basis, and how that affects their ability to
carry the mortgage that they’re looking for,” said Ryan Leahy, inside
sales manager at Massachusetts-based lender Mortgage Network.
The bad news, as you seem to be aware, is that the pandemic
has complicated the process by which mortgage lenders determine whether someone
with student debt is creditworthy and can handle the burden of paying their
mortgage each month.
You don’t mention what type of student loans you have, as in, whether they’re private or federal loans. That makes a big difference in terms of how the underwriting for a mortgage would work right now. Under the CARES Act, payments were frozen for certain federally-held student loans, though around $165 billion in federal student loans owned by commercial lenders is ineligible for this forbearance.
Back in August, President Donald Trump announced that this student-loan forbearance would be extended until the end of the year. While that relief is certainly welcome by many borrowers who have lost jobs during the coronavirus crisis, it does create some headaches when a borrower tries to get approved for a mortgage.
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Mortgage lenders must determine a borrower’s debt-to-income
ratio during the underwriting process to determine how much a household could
afford to pay toward a mortgage each month. “How this debt is evaluated by
lenders depends upon loan type,” said Mark Milam, founder and mortgage banker
at Highland Mortgage, a Georgia-based lender.
Typically, lenders glean that information from an applicant’s
credit report. So if a person typically pays $400 a month, for example, toward
their student debt, then that’s what a lender would use to determine their
debt-to-income ratio. And in those cases, lenders would not worry about the
total amount in student debt someone has.
But forbearance makes that trickier. “If we were to run a
credit report on this individual or someone else, it would typically kick back
as a zero-dollar payment right now because most folks are in forbearance and
not having to pay back those federal loans,” Leahy said.
Lenders have a few options on how they can move forward in
this situation, dictated by the type of loan an applicant would receive. Fannie
Mae requires lenders to look at the full student-debt balance, calculate what
1% of that would be and treat that as the amount of the monthly payment for
their underwriting calculations. Freddie Mac, on the other hand, only requires
0.5% of the loan balance for these same calculations.
For FHA loans, lenders can go about this a few different
ways. They can choose between 1% of the loan balance or the credit report’s
stated monthly payment, whichever is greater. Or they can use the actual
documented payment from the servicer, if it will fully amortize the loan over
the term. In most cases, Milam said, FHA lenders calculate the debt load using
the 1% figure.
“The people at the top dictate how everything gets done at the bottom,” said Brent Chandler, founder and CEO of FormFree, a borrower data and analytics technology company. “If the investors that are buying loans from [Fannie and Freddie] have not changed their models, or the way they look at data, then everybody down below has to do it the same way that the investors are accustomed to.”
Of course, in your case, even 1% of your student loan balance would appear as a massive monthly burden, which could preclude you from qualifying for a home loan. But you can provide additional documentation to your mortgage lender to help your case.
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When forbearance ends, there’s a good chance that you’re going to enter into an income-based repayment plan with the servicer of your student-loan debt. In that case, the servicer will look at your income to determine how much you pay toward your student loans each month. Because you’re still in school, there’s a chance that those payments would be quite low.
What you can do is get in writing what your expected
payments will be when the forbearance period ends from your servicer. You can
then provide that documentation to your mortgage lender, and they can use your
new payments in lieu of the percentages.
You mention that you work as an educator. That means you could qualify you for loan forgiveness if you work at a public school, though that program could end. In such a case, your student-loan servicer might actually say you don’t need to make a monthly payment, and mortgage lenders can use that information, too.
That said, you mentioned you’re not planning to buy your
home until next summer. And things could easily change in the meantime,
especially depending on the results of the Nov. 3 elections. So what should you
do in the meantime?
The mortgage experts I spoke with said that, all things
being equal, it’s a good idea to put money away in savings right now to grow
your down payment. But if you’re carrying other debts, particularly ones with
large monthly payments or high APRs, it could be advantageous to pay those down
in the interim.