student loans mortgage math

Student Loans and Mortgages: Your Best and Worst Case Scenarios

Michael Lux Blog, Student Loans 2 Comments

Student debt can have a tremendous impact on your ability to get a mortgage.  How a potential lender handles your student loans, and the student loans you cosigned for, can vary greatly from lender to lender.

This site has previously discussed the basics of qualifying for a mortgage with student loans.  Today we will look at some of the best case and worst case situations on the many ways lenders view the debt.

Student loans can muddy the financial water

Normally, when a lender makes a mortgage approval decision, they add up all the of your monthly debts.  These debts include car payments, credit cards, and your protested new mortgage.  They then compare these debts to your monthly income.  The number they generate is called your debt-to-income ratio.  This numbers is t the heart of the mortgage approval or denial decision.

Student loans are not as simple as most other debts.  Unlike a car payment, which has a fixed monthly payment and a clearly defined end date, the monthly obligations of a student loan can change.  If you are on an income based repayment plan, your monthly payment will go up and down with your income.  If you co-signed a student loan you might not owe anything, but you could end up having to pay quite a bit of money each month.  How your lender counts the debt can dramatically alter your debt-to-income ratio.

How are my student loans counted?

Some student loans are pretty simple.  If you are paying $150 per month for the next seven years to pay off your loan, it is a safe bet that the mortgage company will be using $150 per month for their calculation.

If you are on Income Based Repayment or Pay As You Earn, your monthly payment is fluid and harder for the lender to analyze.

Best Case Scenario: What ever you pay each month is how they count it.  If IBR math says you only need to pay $50 per month on $90,000 in student debt, your lender may just use the $50 per month figure.  Even though $50 per month will clearly never pay off $90,000 in student loans, lenders may still go with $50 per month for their calculations.  With programs like student loan forgiveness in play, many lenders realize that your true monthly cost of the debt may actually be $50.  Furthermore, while it is possible that your monthly payments could increase, it would also mean that your income would also be increasing, thus you would still be able to pay your mortgage.

Worst Case Scenario: Your lender insists on using a higher payment for their calculations.  This possibility becomes very likely in the event your monthly IBR payment is $0.  If they see a $0 obligation on your credit report, most lenders will assume it is a deferment or a forbearance.  They will also want information from your student loan servicer about what your payments will be when the “deferment or forbearance” ends.  This is bad news for you the borrower, because your loan servicer may only be able to give them the standard payment on the 10 year repayment plan (they can’t project IBR or PAYE because they don’t know your future income).  As most student loan borrowers realize, the 10 year repayment number is normally pretty high and doesn’t always reflect what a borrower will actually have to pay.  A lender using this larger, inflated number could derail your mortgage application.

The way mortgage companies handle loans that you cosigned for can get particularly confusing, be sure to check back tomorrow for part two of Student Loans and Mortgage Math.

  • Lil25

    We don’t qualify for IBR anymore, so we switched to extended repayment to lower our monthly minimums. We still overpay by quite a lot each month, but for purposes of qualifying for a mortgage, they just use the minimum payment, not the amount we actually pay, when calculating DTI.

  • You will probably never know how the mortgage underwriter will treat the student loans until you go through the actual mortgage application process. Even the mortgage pre-approval process might not give you a clear picture (since pre-approvals usually aren’t done by underwriters).