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Living Big in The Big D

With Tara Deming
Friday, June 24, 2016 7:55 AM

Financial Fridays: Students Loans and Mortgage Approval

By: Tara Deming

Congratulations!  You went to school, worked hard to earn a degree, a specific skill or learn a trade.   You are now reaping the benefits of your hard work and earning a living using the acquired knowledge. Unfortunately, it wasn’t free and you weren’t prepared to pay for the costs of a secondary education. As a result, you like a large percentage of Americans took out loans to cover the cost of your education.  Thanks to climbing tuition and inadequate college savings, millions of Americans now have at least one outstanding student loan.   Making student loan payments late or going into default on an education loan has the same impact as doing so with any other loan or line of credit.


Even if you make timely student loans payments the size of your student loan and your monthly payment amount can still have a detrimental impact on your debt to income ratio.  The DTI ratio is a factor in determining the size of the loan you qualify for or if you qualify at all.  One solution to solving the issue of allowing your student loan payment to affect your DTI and approval is to consolidate your loans.  If you have several federal student loans working with your student loan provider(s) to combine the loans into one monthly payment can lower the monthly payments thereby improving your chance of being approved and allow you to qualify for a larger loan.  Recently, a client was able to increase her loan approval amount from $175k to $235 by consolidating her student loans.  Another approach would-be home buyers with a solid earnings history have to lower their debt-to-income ratios is to refinance their student loan debt with a private lender at a lower rate.  Doing so could save hundreds of dollars and allow you to compete better in North Texas competitive buyers’ market. A third way to tame your debt-to-income ratio is to lower your monthly payments by enrolling in a government repayment plan. The Department of Education offers several income-driven repayment plans that can lower your monthly student loan payment by extending your loan term.  There are also loan forgiveness programs for those in specific occupations such as teachers and nurses. 


If you haven’t already noticed, let me point out that the debt to income ratio has a major impact on your ability to qualify for a mortgage loan. Recently there have been some changes to how student loans impact mortgage loan qualification.  Prior to October 2015 if your student loans were in deferment, the monthly payment was not considered in your DTI.  However, due to the passing of new laws if they are currently deferred and not in repayment, the student loan must be qualified at 2% of unpaid balance.  So if you owe $20,000 in student loans $400 will be added to your debt to income ration.  This is done to prevent buyers from going into default due to the introduction of a student loan payment after the deferment period ends. 

 If you have student loans be sure to make timely monthly payments and keep your loans from going into default. Rather than go into default or be denied for a mortgage loan seek  out a solution that will help you work around any dilemma’s. Only take out what is necessary and keep in mind your student loans will have an impact on your ability to get a mortgage regardless of whether or not they are in deferment. 

Once again I'd like to take the time to give my disclaimer on credit. By no means am I a credit specialist, mortgage lender or financial adviser. What I am is someone who has made mistakes, sees the mistakes my clients have made and would like someone to be able to benefit from them.  Maybe you already own a home and this information is not beneficial to you. There is someone, whether it is your child, friend, co-worker, or family member who needs guidance to take control of their financial future. 

Tara Deming Licensed