AL and FL Mortgage News

If you or your child are looking at colleges and universities in the near future or are enrolled now, student loans maybe be part of the equation.  Yes a degree significantly increases future income potential and financial stability over not having one and know we are big proponents of education.  As mentioned throughout previous posts owning a home also plays a massive role in building financial security and net worth dozens of times greater than those who rent.  There are smart ways to accomplish affording a good education and owning a home but the growing cost of education is fueling larger and larger student debt when impacts the latter.  Many do not understand that student debt negatively impacts how much house you can afford and in many cases prevents others from buying after graduation.  On statistic published by Bloomberg in MPA just days ago mentions 24% decline in homeownership among student borrowers aged 18-35 from 2009-2019.  In handling student loan debt and financing homes I hope to provide the basis for a different way of thinking for both parents and students.

A high school diploma does not stipulate that an 18 year old can financially provide for themselves in any way.  We can blame teachers and educators OR we could take on a greater responsibility.  I believe that if parents encouraged and maybe required their kids to first learn a trade before enrolling in a college or university we would immediately she a paradigm shift.  To quote Mike Rowe in a recent interview concerning jobs in 2022, for every five tradespeople that are retiring only two are replacing these jobs so the supply is decreasing meaning the demand by employers is extremely high.  Ideally students can spend time attending county or state community colleges to learn skills within a trade, get certified, and immediately have a way to feed themselves before they decide to leave the nest.   Trades are the single fastest way to immediately increase earning potential before they leave home and before they have the chance to incur any student debt.  (Examples are cosmetology, HVAC, electrician, plumbing, just to name a few.)  For others the military is a similar path to learn a trade (and yes life skills too) and I would agree far better for some.  If you want more information, Mike Rowe's Foundation trades is a very good starting point.   

The time it takes to get trade certifications is not 4 or even 2 years.  Since demand from employers is so high, being enrolled in one of these programs and being serious about work and earning money will easily land you a job making $15-18/hr.  By starting work first, students can get a taste of earning, spending, building credit, and the value of money before agreeing to incurring any student debt.  It enables students to get much needed job experience, explore opportunities in that field even if they don’t plan to continue long term and it would give them a way to pay for school day one.  Working in a trade field coupled with paying for classes while attending undoubtedly creates more skin in the game and students tend to learn more in that class, thereby improving the product itself.  As a society we must eliminate the stigma that is “blue-collar” jobs because you can earn far more money compared to many white-collar jobs.  Also having a trade and earning income and paying for school while in school versus incurring/deferring large sums of debt is a far better long term plan.   Being a slave to long term debt for a decade or more will pale in comparison to what kind of college experience you think you might have had. 

When you compare mortgages and student loans, the mortgage industry forces us to prove ATR which is your ability to repay your loan and I think this is a smart protection for our industry and the economy.  Colleges and universities have been increasing their tuition costs annually by double percentage points year over year and a student of any major can basically finance tuition, room, board, et. regardless of their declared major.  This means that a social worker who might earn $35,000 a year can finance $120,000+ and likely never be able to pay off their loan without some for of additional assistance like a second job/income or a spouse’s income.   This means student loans are granted to many knowing many will likely never repay in full and the government will still allow you to borrow.  There are many statistics which show a shrinking median income among student debtors and an increasing number of students borrowing each semester so it is my daily work experience that we have a bubble approaching fastly approaching $2 trillion that isn’t about homes or real estate.  

What if we started all of this early in high school and taught a course that echoes this?  If so maybe Chapter Three would be called “How To Shop for an Education.”  The underlying theme would be taking the same classes but earning the same credit at institutions across the street from big universities.  The vocabulary would begin with defining cost per credit hour and dual enrollment.  The day one homework assignment would be to find just how many classes you can take elsewhere nearby but still earn credit at the state school.  This would illustrate that bargains exist in education where you can offset the crazy high cost in pursuit of a degree.

I will close in saying, don’t believe the lie that you have finance the large burden of your education or that of your child(ren).  Your kids are crazy smart and unlike any other time in history, you can empower them in a short window of time to make better life decisions, incur less debt, and build equal or greater financial security faster and in a far less painful way.   You owe it to yourself and your kids to explore some for your sake, theirs, and future generations.  

Note: If you already have student loan debt and want to buy a home, do not be discouraged or feel as if it is too late for you.  We help people who owe on student loans almost every single day.   If you want to stop renting we can help you develop a plan on how to get there 100% for free, no strings attached.  Reach out to us today.

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Posted by Devin Murray on January 24th, 2022 10:43 AM

Last week we received a call from a young professional who is gearing up to make his first home purchase.   He had good credit, steady annual income, and enough money saved for a small down payment on a new home for the family.   During the call, he voiced concern about the pre-approval amount he qualified for because of his student loans.  He had basically no debt other than a little over $130k in student loans all in deferment for the next 11 months and was of the mindset that this debt would not count against him as a result.  His credit report showed a $0/mo payment and he was a little confused as to why when he spoke to different lenders local, regional, and national each offered very different opinions on the purchase amount he could qualify for.

In the universe of mortgage financing student loans are analyzed by credit underwriters according to three main data points that normally appear on your credit report in order of importance: Repayment status, monthly payment, and current balance.

While monthly payment and balance don’t need further elaboration, knowing your repayment status and how it impacts how your payment is viewed by creditors is a little confusing.  For anyone seeking a mortgage your student loan is considered to be in a Regular Repayment status if the monthly payment is fixed and is fully amortized over full term (i.e. 5,10, 15 or 20 years) of the loan.  The best case scenario here is when the fully amortized monthly payment amount(s) appear on the credit report along with your balance(s).   In some cases you can be at the start (or restart) of regular repayment status, but the payment amount does not show on the credit report and you can clear this up with documentation from your student loan servicer showing what the payment should be.

If your student loan is not in a regular repayment status you are most likely in Deferment, Forbearance, Graduated Payment plan, or an Income Drive Repayment (IDR) plan.  No matter what your scenario, having one of these status means you are paying an amount less than the fully amortized payment or you aren't paying anything at all.   When applying for a mortgage your credit report will show one of the following:  no monthly payment (as in no number appears in the payment field), a $0/month payment is listed, or a payment significantly smaller monthly payment with respect to the balance of the student loan(s).  None of this disqualifies you from getting a loan but the debt will most likely be counted toward your debt ratio using several different methods which will impact what you can and cannot finance.  

FHA: FHA underwriting is the most inflexible next to USDA with respect to student loans.  If you are not in regular repayment status, FHA will use the greater of 1% of the outstanding principal balance or the monthly payment on the credit report.    While highly unlikely, if documenting the fully amortized payment over the life of the loan proves to be less than the 1% or payment showing on the credit the fully amortized payment can be used.

  • So if our borrower from the above example wanted to go with an FHA mortgage an underwriter would likely calculate $1,300/mo in future payments since his credit report showed $0/mo for each of the deferred loans.  FHA isn’t evil because of this nor should you avoid FHA loans if you have student loans.   FHA allows for many other things with debt ratios and credit scores that conventional cannot, so FHA loans are still great financial tools in many circumstances.

USDA (Rural): USDA underwriting always defaults to 1% of student loan balance monthly payment calculation method or the payment that appears on the credit report, whichever is more, no exceptions.  Combined with the most conservative debt ratio across the board the USDA loan can be very difficult for any borrower(s) with student loans.  Other restrictions like family household income limits and property eligibility also apply to USDA loans.  Just as with FHA, USDA loans have great offerings too.

Conventional:  If you are talking to a lender, regardless if you have student loans, ask if they offer both conventional loans underwritten by both Fannie and Freddie Mac.  If they don’t and you are buying/refinancing in Alabama or Florida call us at 888-269-8335.  We say this because not all conventional loans are the same and this advice will be true even if you have no student loan debt.

  • As a general rule conventional loans afford borrowers breaks that FHA and USDA do not.   According to Fannie Mae if a monthly student loan payment is on credit, as long as it is not zero dollars, can be used.   This means borrowers in both Graduated Payment and IDR plans can potentially catch a huge break with Fannie Mae if a payment greater than $0 is reporting.  For those in deferment or forbearance status the lower of the 1% of the loan balance OR documented fully amortized payment can be used.   
  • In better news Freddie Mac is easier and more flexible than Fannie Mae.  The same break applies with Graduated Payment and IDR plans as with Fannie Mae but those in deferment or forbearance status can use the lower of the 0.5% of the loan balance OR documented fully amortized payment can be used.  Also unlike Fannie, Freddie will actually allow $0 payments to be counted in some unique instances where deferment extends 12 months beyond the closing date.

So for our example above using a conventional loan underwritten by Freddie Mac versus Fannie Mae, Freddie is twice as flexible with the student loan debt in that it would calculate our borrower’s projected student loan payments at $650/mo versus $1,300/mo.  

VA: For eligible veterans it is no surprise that the VA is likely the most flexible with student loans.  VA underwriters will use the greater of the student loan payment listed on credit report or 0.42% of the balance (that is 5% divided by 12 months).  If the 0.42% is greater the actual payments can be used with a letter from the servicer.  IDR plans resulting in a monthly payment greater than $0/mo can be used, and IDR plans resulting in a $0/mo payment can be used if they continue 12 months beyond the loan funding date.  Also loans deferred loans beyond 12 months of the loan funding date can be calculated at $0.

If our borrower would have been eligible for a VA loan, the payment calculated by underwriting would be $546/mo versus $650 (Freddie) or $1,300 (Fannie Mae).

Jumbo:  Other than to state our own, there is no industry-wide standard for student loan requirements on jumbo loans (amounts over $484,500 as of Oct 2019 in AL and FL (exclude Monroe Co)).   Loans in repayment can use the payment on the credit report or documentation of actual.  Any loans showing a $0 payment will use the 1% of balance monthly payment calculation.  We have other info available on this blog for Jumbo Loans and Jumbo Construction Loans.

If the numerical differences between how these student loans are calculated from program to program doesn’t seem important, know that for this buyer it meant being able to afford the $325,000 home in a much better neighborhood with better schools over a $210,000 property.  For some it might mean the ability to buy versus not being able to buy at all.  For others it might mean being unable to refinance their existing loan.   

Other than Google (j/k Google) there is no evil company preventing people from getting the most truthful information.  With loan guidelines that are updated several times a year and lenders enacting their own overlays on top of those rules will only result in growing public confusion on this and many other topics related to mortgages.   Missing just a little information about how debt impacts you can lead to all kinds of financial decisions that can impact you and your family today and for many years to come.  We believe that empowering yourself with solid information and picking a lender with the highest level of expertise in the marketplace are your keys to success with home buying and refinancing.

If you have student loans and are buying, refinancing, or building a home in Alabama or Florida we urge you to seek out information like this and contact us with questions. No two scenarios are ever the same and we’d love the chance to get to know you and help you plan your future.  

If you want to find out how much you can qualify for today, complete our online application 24 hours a day, 7 days a week.

Can I buy a house if I have student loans?

Can deferred student loans keep me from getting a mortgage?

Do deferred student loans count when applying for a mortgage?

Will student loans in forbearance keep me from getting a mortgage?

Can I afford more house if my student loans are in a graduated re-payment plan?

Does student loan forgiveness in the future allow me to buy a house now?

Posted by Devin Murray on September 30th, 2019 8:15 PM

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