As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
There’s no denying it. A college education in this country is expensive. According to one estimate, the average 2017 graduate is expected to carry more than $38,000 in student loan debt.
That figure is sobering. No doubt it can seem like a heavy debt burden to carry. It takes hard work to pay that off as well, but it doesn’t mean you have to delay your other plans. If you’re looking to buy your first home, but you’ve got student loans, it just got a little easier to qualify.
What if someone else is paying your debts? It may now be easier to exclude those from your debt-to-income (DTI) ratio.
Your home is a huge financial resource. Maybe you’ve been thinking about taking cash out of your home in order to pay off a student loan. Now, you can do that and pay the reduced fees associated with rate-term transactions. But enough teasers, let’s jump into the details.
Student Loan Qualification Changes
There are new guidelines on conventional, jumbo and VA loans that should make it easier to qualify for a mortgage with student loans. Let’s get you educated on the changes so you can make the grade.
Conventional and Jumbo Loans
If you’re getting a conventional or jumbo loan, your student loans are included in your DTI ratio. But it’s getting a little easier to qualify. Here are three ways your monthly payment could be factored:
- The first thing we look at is the actual payment reporting on your credit
- If no payment is listed on your credit report or the payment is $0, we use 1% of the existing balance
- In certain instances, we may use the payment listed on the statement itself
If you have 10 months or fewer payments left on your student loans, they can be completely excluded from your DTI.
FHA loans have recently become easier to qualify for as well. The following are the steps in determining the payment that matters for DTI:
- If the documented payment is greater than $0, we use that.
- If a statement can’t be obtained, we use the payment on your credit report.
- If there’s no statement or payment shown on your credit report, we qualify you with 0.5% of the outstanding loan balance being paid off each month.
If you’re getting a VA loan, the guidelines are changing if you’re in the middle of repayment or forbearance for your student loans.
If this is the case for you, we now qualify with the greater of the following options:
- The payment listed on the credit report
- Take 5% of the student loan balance and divide it by 12
I know the second alternative may sound a little confusing, so let’s do a quick example.
If you have $30,000 in student loan debt, 5% of that is $1,500. That number is then divided by 12 and $125 is included in your monthly DTI.
If you have less than 10 months’ worth of student loan payments left, that debt can be excluded from your DTI.
Excluding Debts Paid by Others
On conventional loans, it may be possible to exclude any debt payments paid by others. What does this mean for you?
For example, if you’re lucky enough to have your parents pay your car or student loan payment, that debt doesn’t have to be counted in your DTI. This is true regardless of whether they’re an obligated cosigner on the loan. There are just a couple of requirements that must be met:
- A debt can be excluded if there’s evidence that someone other than you has made the payment for the last 12 months in the form of bank statements or canceled checks
- There can be no late payments in the last 12 months
Paying off Student Loans with Equity
If you’re looking to pay off one or more student loans with the equity in your home, you’re now able to do this through a new conventional loan option. This can be done while paying the reduced fees associated with a rate-term refinance as opposed to a cash-out refinance. The key benefit here is reduced closing costs.
There are a few key restrictions here that you need to know about in order to qualify for this loan pricing:
- You must maintain at least 20% equity in your home after the cash is taken out.
- You must pay off one or more student loans at closing. No additional debts can be included.
- If there’s any incidental cash back to you after paying off the loans, it must be no more than 2% of the loan amount or $2,000, whichever is less.
Hopefully these new student loan and debt exclusion policies are helpful to you in your mortgage process. If you would like to get started online, you can get a preapproval or full refinance approval online through Rocket Mortgage® by Quicken Loans®. If you’d rather get started over the phone, one of our Home Loan Experts would be happy to take your call at (800) 785-4788. Got questions for us? Leave them in the comments and we’ll be happy to answer.
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