It’s not the avocado toast or subscription boxes, but instead it’s an increase in college debt keeping millennials from buying houses. I see this all the time – potential homebuyers with a steady income, ready to take the leap, and their student loans are throwing up a road block.
However, last year, new programs were released making it more likely borrowers with student loan debt will qualify for a mortgage loan.
Student Debt Payment Calculation
The first thing I do with potential borrowers is help you know what you can afford.
A major piece of determining your home buying budget is calculating your “debt-to-income” ratio”: the percentage of your monthly income which is paying for debt (student loans, auto loans, credit card and other monthly debt payments). Usually, a good rule of thumb is about 35% to 40% for loan approval.
Previously, if you were on an income-driven repayment plan, I had to calculate your monthly payment based off of 1% of the balance due instead of your actual payment amount. For example, say you have $35,000 in student loan debt, and your monthly payment is around the $150 - $200. Instead of calculating your debt-to-income ratio with $150 - $200 as your payment, I was required to put in $350 as your payment. Sometimes, this was the breaking point of getting approved.
Now, I can calculate your prequalification with your actual monthly payment, unless it is zero. This opens up doors to potential home buyers who previously didn’t hit the sweet-spot of 35% - 40% debt-to-income.
Student Loans Paid by Others
It’s becoming more common for student loan debt to be paid by third-parties, such as employers or family members.
In the past, the fact that potential homebuyers weren’t paying their student loan payments wasn’t considered in their debt-to-income calculation.
With the new programs, I can exclude student loan payments made by someone else from your debt-to-income ratio leaving more room in your budget and potentially determining your approval.
If a third-party is paying you student loans, make sure:
- The payments have been made on time, and in full, for at least the last 12 months
- You can provide documentation of the payments for the last 12 months
Daunia is an Assistant Vice President of Mortgage Loans at the Hastings branch of Heartland Bank. She is a lifelong resident of Hastings with 16 years of banking experience. She enjoys serving the neighbors in her community.
