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‘The Big Move’ is a new MarketWatch column seeking to answer questions about navigating the world of real estate.
Do you have a question about buying or selling a home? Do you know where your next move should be? Email Jacob Passy at jpassy@marketwatch.com.
Dear MarketWatch,
I am a 58-year-old Black male with a student loan debt of $593,000. Seriously. I have 4 degrees — B.A., J.D., M.Ed., M.A. — and I’m working on my last Ed.D. I am currently employed as an educator.
I would like to buy a house but to qualify is like a pie in the sky. I am working on a down payment of $12,000. But any mortgage company will tell me that they have to count 1% or .5% of my loan balance towards my debt. I would like to buy a house in July 2021. I’m currently renting for $1,390 per month. Any suggestions?
Sincerely,
A well-educated prospective home buyer
Dear Well-educated,
I’ve got good news and bad news for you. The good news is that having student debt — even nearly $600,000 in student-loan debt, as you do — does not inherently preclude someone from getting a mortgage and buying a home.
“We’re not concerned from a mortgage perspective, as to the balance, we don’t care if it’s 100,000 or a million dollars, all we care is about the obligation on a monthly basis, and how that affects their ability to carry the mortgage that they’re looking for,” said Ryan Leahy, inside sales manager at Massachusetts-based lender Mortgage Network.
The bad news, as you seem to be aware, is that the pandemic has complicated the process by which mortgage lenders determine whether someone with student debt is creditworthy and can handle the burden of paying their mortgage each month.
You don’t mention what type of student loans you have, as in, whether they’re private or federal loans. That makes a big difference in terms of how the underwriting for a mortgage would work right now. Under the CARES Act, payments were frozen for certain federally-held student loans, though around $165 billion in federal student loans owned by commercial lenders is ineligible for this forbearance.
Back in August, President Donald Trump announced that this student-loan forbearance would be extended until the end of the year. While that relief is certainly welcome by many borrowers who have lost jobs during the coronavirus crisis, it does create some headaches when a borrower tries to get approved for a mortgage.
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Mortgage lenders must determine a borrower’s debt-to-income ratio during the underwriting process to determine how much a household could afford to pay toward a mortgage each month. “How this debt is evaluated by lenders depends upon loan type,” said Mark Milam, founder and mortgage banker at Highland Mortgage, a Georgia-based lender.
Typically, lenders glean that information from an applicant’s credit report. So if a person typically pays $400 a month, for example, toward their student debt, then that’s what a lender would use to determine their debt-to-income ratio. And in those cases, lenders would not worry about the total amount in student debt someone has.
But forbearance makes that trickier. “If we were to run a credit report on this individual or someone else, it would typically kick back as a zero-dollar payment right now because most folks are in forbearance and not having to pay back those federal loans,” Leahy said.
Lenders have a few options on how they can move forward in this situation, dictated by the type of loan an applicant would receive. Fannie Mae requires lenders to look at the full student-debt balance, calculate what 1% of that would be and treat that as the amount of the monthly payment for their underwriting calculations. Freddie Mac, on the other hand, only requires 0.5% of the loan balance for these same calculations.
For FHA loans, lenders can go about this a few different ways. They can choose between 1% of the loan balance or the credit report’s stated monthly payment, whichever is greater. Or they can use the actual documented payment from the servicer, if it will fully amortize the loan over the term. In most cases, Milam said, FHA lenders calculate the debt load using the 1% figure.
“The people at the top dictate how everything gets done at the bottom,” said Brent Chandler, founder and CEO of FormFree, a borrower data and analytics technology company. “If the investors that are buying loans from [Fannie and Freddie] have not changed their models, or the way they look at data, then everybody down below has to do it the same way that the investors are accustomed to.”
Of course, in your case, even 1% of your student loan balance would appear as a massive monthly burden, which could preclude you from qualifying for a home loan. But you can provide additional documentation to your mortgage lender to help your case.
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When forbearance ends, there’s a good chance that you’re going to enter into an income-based repayment plan with the servicer of your student-loan debt. In that case, the servicer will look at your income to determine how much you pay toward your student loans each month. Because you’re still in school, there’s a chance that those payments would be quite low.
What you can do is get in writing what your expected payments will be when the forbearance period ends from your servicer. You can then provide that documentation to your mortgage lender, and they can use your new payments in lieu of the percentages.
You mention that you work as an educator. That means you could qualify you for loan forgiveness if you work at a public school, though that program could end. In such a case, your student-loan servicer might actually say you don’t need to make a monthly payment, and mortgage lenders can use that information, too.
That said, you mentioned you’re not planning to buy your home until next summer. And things could easily change in the meantime, especially depending on the results of the Nov. 3 elections. So what should you do in the meantime?
The mortgage experts I spoke with said that, all things being equal, it’s a good idea to put money away in savings right now to grow your down payment. But if you’re carrying other debts, particularly ones with large monthly payments or high APRs, it could be advantageous to pay those down in the interim.
