Student Loans and Mortgage Calculations

Michael Lux Blog, Student Loans 1 Comment

The other day I spent a while on the phone with a couple of mortgage lenders.  The subject of discussion was mortgage math.  Specifically, we were discussing how student loans could impact mortgage eligibility.  Some of what I learned was surprising.

Before I get into the conversation specifics, it is worth noting that this isn’t the first time this site has examined how student loans can affect your ability to buy a home.  Last year, we addressed some of the basics regarding qualifying for a home loan with student loans.  In that article we discussed the importance of a good credit score and how a debt-to-income ratio can affect your buying power.  Today, we will get more into the nitty-gritty.

Loans you cosign will not necessarily count against your income

Generally speaking, cosigning a loan comes with huge risk because you are obligated to repay the loan in the even the borrower fails to make their payments.  This obligation is reflected in your credit report.

If you cosigned a loan for someone who is still in college, things can get pretty complicated.  However, if you cosigned on a loan and that person has finished school and kept up with the loan, you may be in luck.  If you can provide proof that the borrower of the loan has made on time payments for 12 consecutive months, lenders will not count this debt against you… meaning it doesn’t go into your monthly debt-to-income calculation.  In short, this debt may not limit your ability to buy a home.

However, there are a couple of things to keep in mind.  First, the documentation is somewhat complicated.  Not only do you have to show that the borrower made the payments, but you also have to prove that they made the payments with their money.  Records from Sallie Mae will not be enough… you will also have to come up with bank statements showing that the borrower earned the money and made the payments.  Second, the ability to document this won’t necessarily help with computer applications that spit out a yes or a no.  If you apply online for a mortgage, you could get denied before you have a chance to explain the fact that you are in good shape on that particular cosigned student loan.

Your total student debt really doesn’t matter

If you are buried under a mountain of student loans, the only thing mortgage lenders will be looking at is your monthly payments.  That number may seem huge to your eyes, but it isn’t relevant to a lender.

The exception here would be if your monthly payments are $0 per month.  They will see that number and assume you are on some sort of deferment or forbearance and want to know what the monthly payment will be once it goes up.

Things get really interesting with IBR and PAYE…

Mortgage lenders are not student loan experts

Income based repayment plans, such as IBR and PAYE, are not topics that your lender will necessarily be familiar with.  If you explain that your monthly payment is calculated to be 15% of your monthly discretionary income based upon your most recent tax return, your mortgage lender probably won’t care.

As long as they see a monthly payment associated with your loans, that is the number that will be used for your mortgage calculations.  The fact that it definitely will be changing with your income does not seem to interest most companies.

Most mortgage lenders want to be able to get you approved for a loan (that is how they get paid).  The big hurdle for them, and for you, is the underwriting criteria that is dictated by the federal government and the lending institution. When it comes to IBR and PAYE, they can’t really project salary changes and account for loan payment fluctuations. As a result, your current monthly payment is what they will be using for their math, and information beyond that really doesn’t matter.