It seems obvious that having student loans would making buying a home more difficult. The surprising thing is how negatively student loans can affect the ability to buy a home, even in the case of a co-signer.
One Family’s Story
I just heard from a reader who was applying for a mortgage. She has one daughter who is in her first year of college at a state school. She is a cosigner on some student loans, but a relatively small amount. The lengths the mortgage company went through over this relatively small sum of student loans were amazing.
For those of you not familiar with the mortgage process, one of the key factors that companies look at is often referred to as your “back end ratio”. This number looks at the amount you currently owe on all of your debts (credit cards, auto loans, student loans, etc.) to your monthly income. If the amount you owe is too large compared to what you make, you will not get a loan.
The shocking part about this example is how the company treated the cosigned loan. They insisted upon a three way call between the perspective borrower, the mortgage company, and the student loan lender. The mortgage company wanted to know exactly what the monthly payments on the loan would be in 2019, assuming that no payments were made for the next five years. The mortgage company then took this inflated number and plugged it into the back end ratio to review the loan.
This is shocking for a number of reasons:
- The student loans were cosigned. Unless this reader’s daughter fails to pay her student loans, the reader will have no obligation whatsoever.
- The mortgage company manipulated the numbers to inflate the student loan figure as much as possible (this practice is highly unusual and doesn’t happen with other types of debt).
- Mortgage companies don’t usually insist on speaking with the other lenders that appear on your credit report.
Based upon this information, it appears as if the mortgage company saw a cosigned student loan, a daughter in college, and tried to find any excuse they could to deny the loan.
After discussing this situation with an attorney who has been doing real estate work since the 80’s, he made a prediction about where things were headed:
During the 80’s when interest rates were skyrocketing, mortgage companies often would insist that if the house sold, the full value of the mortgage was due. They were trying to avoid a type of sale called a land contract. The advantage of the land contract is that the new buyer can purchase the home at the low interest rates of previous owner. We almost never see them today, in part, because interest rates are much lower.
This history lesson is important because it set a precedent. Mortgage companies can insist upon full payment of the loan based upon future conditions.
The reader’s story shows the growing fear mortgage companies have over student loans. If this current approach doesn’t do enough to address their concerns about student loans and future obligations, they could start writing a new term into the mortgage agreement. They could say that if you cosign a student loan, the entire balance of your mortgage is due. In effect, they could prevent parents from cosigner for their children’s student loan if they are still paying off their home.
The good news is that this practice has not started. The bad news is that this country has a trillion dollar student loan problem and it is getting worse by the year. After the mortgage crisis and recession, most lenders won’t sign off on a risky mortgage. As student loans become more toxic in the eyes of bankers, they will make buying a house progressively more difficult.
What does this mean for you?
It means that cosigning for student loans is becoming more and more risky. For families with students still in college, it is critical to find ways to avoid cosigning on loans.
If you have already cosigned a loan, it means it is time to start planning ways to get removed from the loan. For starters, you could send this email to your lender. If conventional means at getting released from the loan don’t work, you can always try some less conventional options.
Readers: Have student loans gotten in the way of your mortgage? We would love to hear about it as we track this developing situation.