How do mortgage lenders look at student loans?

November 20, 2012 10:05 AM

How do mortgage lenders take into account student loans when calculating whether and how much to lend? Special details inside...

My husband's income and credit history will be what they look at, since I am a sahm. He has very good credit and no debt...except for student loans that amount to about 3/4 of the cost of the homes we are looking at. His yearly income is roughly a third of the house price. Final details: we are in the American Midwest, and a parent is paying the whole monthly payment for the loans for ten years.

posted by percor to work & money (6 answers total)

Yes, because the income:debt ratio.

They take into account EVERYTHING. Additionally, you can't discharge student loans in bankruptcy, but you can ditch a mortgage if you have to.

My recommendation is to rent as cheap a place as you can stand, work like HELL to pay down your debt, and THEN buy a house.
posted by Ruthless Bunny at 10:09 AM on November 20, 2012

Lenders will look at your total combined debt to income ratio (based on the amount of the your monthly payments). I'm not sure what the exact allowable debt ratios are these days because I've been out of the business for a number of years, but I'm guessing that if your total monthly debt payments (including the mortgage payment, taxes, and insurance) would not exceed one third of your gross monthly income, you should be ok. If not, and you can prove that you have a relative making the student loan payments for you, lenders may be willing to grant an underwriting exception. You will need solid proof, however, most likely in the form of your relative's bank statements documenting the payments for at least a year or so.
posted by seymourScagnetti at 10:24 AM on November 20, 2012

My information may be out of date...

But as I remember it, there is a "backend debt to income ratio" and a "frontend debt to income ratio". (They may just care about only one now.) When I bought a house, with my income and credit score, I was allowed 41% backend DTI, and 36% frontend DTI. This meant, that if I made $1000 a month (gross income), I could spend up to $360/month on mortgage (including taxes and homeowner's insurance, principle, interest, and private mortgage insurance) OR $410 total on debt (credit card minimum payment, student loans, auto loans, etc), whichever is smaller.

In this scenario, you'd be buying a $36000 house. If you pay 20% down and get a 4% interest mortgage, your monthly payment's probably around or under $180 (remember, tax and insurance!). If your husband's student loan payment is $135, you have a combined DTI of $315, which would be okay.

My post is making A LOT of assumptions that are probably very, very wrong. You're best off asking a mortgage lender what he thinks (given that you know your credit score accurately).

The fact that a parent is paying the student loans only matters if the student loan is not in his name but in his parents'. It doesn't matter who's paying, but who has the obligation to pay. (If they co-signed, it's the same as if he signed them by himself.)

Also, I second the recommendation to focus on paying down your student loans before buying a house.
posted by ethidda at 10:34 AM on November 20, 2012

Most lenders will not allow more than 0.36 of a "back-end" total debt to (gross) income ratio. See more info here:

http://www.bankrate.com/finance/mortgages/how-much-house-can-you-buy--1.aspx

So it would depend on how much the payments for the student loans are compared to his income. If you aren't the ones who will be paying the mortgage, though, it may be simpler to just have the parent buy the house instead.
posted by Asparagus at 10:35 AM on November 20, 2012

I bought a house in 2009 and my mortgage broker told me that my student loan debt basically didn't matter in the big picture, though they did look at my overall monthly payments (including the student loan) to see if I could afford the mortgage payment. They will not care that his parent is paying the note.
posted by tryniti at 10:36 AM on November 20, 2012

It is possible to show 12+ canceled checks to have the student loans waived but it is definitely something you don't want to count on. Usually proving someone else pays your debts will only help on debts that are in 2 people's names. Example would be if he co-signed on a loan and he proves that the other person pays. If mom/dad cosigned the student loan he may be in luck.

On the other hand if he has no debt the only reason he has good credit is the student loans are being paid on time. If he proves he doesn't pay them he may prove he doesn't have such good credit after all.

On FHA loans,
The debt ratios on new construction with credit scores above 640 are 31% & 43%.
The debt ratios on new construction with credit scores below 640 are 31% & 36%

The "front" end is the house payment along with the payment for insurance, property taxes and Private Mortgage Insurance (PMI)

The PMI is 1.25% of the loan amount divided by 12 months.

The "Back" end is all your bills seen on his credit report and will definitely include his student loans.

It is theoretically possible to defer student loans and have them not counted but it very difficult to do so as not only do you have to get them deferred but you have to so for a longer term than nearly any student loan lender will agree to.
posted by 2manyusernames at 11:03 AM on November 20, 2012