Student Loans and Home Loans
More and more students as well as parents are resorting to loans to pay for college. Public universities have had the ability to set their own tuition rates for years now and for many, attending college means going into debt just for the privilege. And that’s just the tuition, never mind the multitude of fees that go along with it. Books, supplies, housing all takes its toll. Student loans are relatively easy to get while in school with the only promise made is paying the loan back later on. No payments are made while the student is in school. Today, the average student loan debt for undergrads is around $40,000 and for those seeking a professional degree, loan debt can balloon to six figures.
Student Loans and the Housing Industry
The rising cost of college and the proliferation of student loans also have an impact on the economy, including the housing industry. When a student repays the loans their debt-to-income ratios are higher compared to someone without student loan debt. There is a grace period for most student loans that give the graduate some time to find a job before payments are due. Someone graduating with $50,000 in student loan debt could have monthly payments around $500. That’s a lot for someone fresh out of school. In fact it’s a lot for anyone to have to pay.
There is a status called forbearance. Grads can apply directly with the loan servicer to delay the monthly payments for up to a year. If needed, the individual can apply for another year of forbearance. It’s relatively easy to receive forbearance. The servicer reviews income and expenses and if there is not enough residual income left over to service the student loan, the forbearance request will be accepted.
How Deferment Works
Deferment means the loans don’t have to be paid back right away upon graduation. A deferment period can be as little as a few months up to two years or even longer. But deferment is treated differently by lenders when evaluating a loan application. With forbearance, the monthly payments aren’t counted against the borrower. With deferment, the monthly payments, even though they’re put on hold, are counted.
When someone has graduated that additional $500 per month will impact how much someone can borrow. For someone that makes say $6,000 per month, lenders would like to see the mortgage payment, including an amount for taxes and insurance, be somewhere around 30 percent of gross monthly income. In this example, that would be $1,800. Lenders also factor in additional monthly obligations such as a car loan or credit card debt which should be somewhere closer to 40 percent of income, or using this example, $2,400. If the house payment is $1,800 that leaves an additional amount of $600 allotted for other consumer debt. But throw in a $500 student loan payment and that doesn’t leave much wiggle room for a car payment, credit cards and the like.
The Takeaway
If you’ve got student loans and are thinking about buying your first home, it’s a good idea to speak with your loan officer first. You’ll be able to see how lenders view student debt, when the payments are counted and under which program. It’s more common than ever for a graduate to carry some amount of student loans but those loans will be counted in the same manner as any other monthly debt. When entering your first year of college, graduating seems so far away. But one day you will no longer be a college student, you’ll be in the workforce. Do as much as you can to avoid student loans if at all possible and if you can’t, keep them to a minimum. How much debt you carry once out of school will affect how much of a mortgage you can borrow.
