Today, we’re talking about entitlement as it relates to VA loans. An entitlement in this case is the dollar amount the VA promises to repay the lender in the event you default on your mortgage. Entitlement is a tricky thing to explain and understand. Recently, Quicken Loans hosted a VA loan Q&A on Google Hangouts to try to answer the tricky entitlement question. Read on to find out more.
On the scale of big lifetime purchases, it’s safe to say mortgage loans rank pretty high. Another big one? College education. Out of the 20 million Americans who attend college each year, nearly 60% take out loans to cover the cost of their education. A majority of them are still paying them off in their 30s, and 17% of those making payments are older than 50 years old, the Chronicle of Higher Education reported.
Because of these large numbers, it’s looking like millenials are waiting longer to buy homes. In 2010, the National Association of REALTORS reported the average first-time home buyer was 30 years old. In 2013, only 28% of home buyers were born between 1980 and the early 2000s. Yahoo Finance reports that millenials are renting or living with their parents for as long as they can, and they’re putting off purchasing homes. Mortgage experts are saying student loan payments play a large role in this decision.
If you’re thinking about buying a home but you have outstanding student loan debt, you’re far from alone – you’re riding in the same boat with 37 million Americans. Quicken Loans Operations Director Lindsay Villasenor said about half of the applicants she sees have some sort of student loan debt on their credit report.
“Education is expensive and many folks aren’t independently wealthy enough to shell out the cash,” Villasenor said. “It’s not alarming when we see student loans on a credit report.”
Although having student loan debt doesn’t necessarily make you a bad candidate for a mortgage, your ability to pay it off successfully can play a big role in your approval. When underwriters like Villasenor are looking over applications, one of the most important things they’re looking for is steady income. Eligibility for a mortgage loan relies heavily on a low debt-to-income ratio, or DTI. So, if a high percentage of your income is allocated to paying off debt, it means there’s less money available to make loan payments, and your chances of being approved can decrease. If your DTI is 45% or lower you’re in good shape, but if your monthly income is rocked significantly by student debt payments, it can be detrimental to your approval.
If you’re looking to buy a house and have any outstanding debt, the best thing you can do is make regular, on-time payments. “Sometimes, if an applicant has too much other debt and not a lot of income, student loan repayments could put them in a spot where they don’t qualify without paying them off or paying other debt off,” Villasenor said.
Your debt’s impact on your loan approval also varies based on the type of loan you’re looking for. Villasenor explained that if you’re eligible for VA and FHA home loans, any outstanding student loan debt can be excluded as long as you prove the debt payments can be deferred for 12 full months. If you’re applying for a conventional or jumbo loan, your debt will come into play more heavily. Villasenor explained that some loan products have higher pricing if the client’s debt-to-income ratio is too high.
Villasenor also explained how late payments can affect loan applicants. Late student loan payments or delinquency can lower your credit score significantly, which impacts your eligibility for a mortgage loan. The score needed for approval varies by lender and loan type, but typically anything higher than 620 is sufficient. However, the higher your credit score is, the better off you are. Tools like Quizzle can help you keep tabs on your credit score so you’re in good shape when your home buying time comes.