A Simple Strategy That May Help You Buy A Home if You Have Student Loan Debt

Hello Hampton Roads,

I frequently get questions about student loan debt as this seems to be one of the biggest factors in preventing people from being able to qualify for a higher mortgage amount or to qualify for a home oan in general.  As student loans can range from the thousands to hundreds of thousands, it's easy to see how this can have big impact on a person's debt to income (DTI) ratio.  The higher this ratio, the lower mortgage amount one can qualify for or if the DTI is really high, this may prevent qualification all together.

Student Loan Debt

Paying down the student loan debt will help but for high balance loans, not many people can afford to pay down the debt to sufficiently lower their their DTI. Besides,  payments have been paused till January 31, 2022.  However there is a simple solution that may help; but before we get into that we first have to understand how a lender counts student loan debt.

Prior to August 16, 2021, lenders had to count the actual amount of payment made or count 1% of the outstanding loan balance  if no payments were being made.  For example if someone has $50,000 in student loans then 1% or $500 would count as monthly debt payment which depending on income, can end up counting a large amount towards debt.   The new rule states that for home buyers using an FHA loan, lenders have to count the actual payment if over $.0.00 or if no payment was made,  they now only have to count 1/2% towards debt which effectively lowers the amount they count by 50% (from 1% to 1/2%).

But it gets even better and here's where the strategy comes in. If a buyer has a high balance loan and is currently not making payments, the buyer can elect to start making payments via Income Based Repaymetn (IBR) plan.  The IBR plan adjusts what someone has to pay based on their income and family size and this can be used with both FHA and conventional finacning.  If a home buyer can qualify for conventional financing and elects to pay via IBR plan and the payment determined by IBR is $0.00 then lenders may count $0.00 towards their DTI. Again this is only for home buyers using conventional financing and IBR.

If you have any quesions about this or the home buying process in general, feel free to contact me for free home buyer consultation.  We can talk about your specific goals and come up with a plan to help you achieve them!



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