If you are considering purchasing or refinancing a home and you have student loans, then this will be a short article that you want to read. One of the primary determining factors in your ability to qualify for a mortgage loan is your debt-to-income (DTI) ratio. Each loan program has a maximum DTI ratio that you cannot exceed, so limiting your monthly debt payments is something to consider when getting ready to obtain a mortgage loan. Your DTI ratio is calculated by adding your total estimated house payment, including your taxes and insurance, to the total of all of your minimum required monthly payments for debt that appears on your credit report and then dividing this figure by your total gross household income.
Let’s look at a quick example assuming that your total estimated new house payment is $1,250, your total minimum credit card payments equal $50/month, your car payments total $450/month and your student loan payments are $300/month. Let’s also assume that your total gross household income is $4,200/month. So your debt-to-income ratio would be:
$1,250 + $50 + $450 + $300 = $2,050 min debt payments each month
To calculate your DTI simply divide this total by your gross income: $2,050 / $4,200 = 48.81%
Let’s also assume that the loan program you’re applying for has a maximum DTI of 42%, which is a common maximum. Using the figures above you would not be able to qualify for the $1,250/mo payment, because it brings your DTI up too high (48.81%). At this point you have two options in order to utilize this loan program. One option is to lower the loan amount you are asking for, which would in turn lower your payment. As long as your payment is low enough to bring your DTI ratio down to 42%, then you’re good to go. The second option is to find a way to lower one or more of your other monthly debt payments in order to lower your debt-to-income ratio.
Finding a way to eliminate your student loan payments from the equation is a great way for many borrowers to lower their DTI ratio. In the example above, eliminating the student loan payment would actually bring the DTI down under the maximum of 42%. ($1,750/$4,200 = 41.667%).
Okay, so let’s get to the main point of this article. Many loan programs allow us Mortgage Consultants to leave your student loan payments out of your DTI ratios, as long as they will be in deferment for a minimum of 12 months from the time you close your home loan. This is so important, because those with student loans have the ability to put them into deferment or forbearance. However, if you incorrectly time your student loan deferment then your student loan payments will most likely be REQUIRED to be included in your DTI ratio, thus throwing off your ratios and limiting what you can qualify for. It is important to speak with a Mortgage Consultant before putting your student loans into any type of forbearance or deferment. It may be in your best interest to make your student loan payments for a couple of months so you can delay putting them into deferment until it’s time to close on your new home. Or, there may be another way of approaching this that will maximize your ability to qualify for the loan you need.
If you have any questions about how this might work or how much home your currently qualify for based on your debt to income ratio, feel free to contact me directly. I can assist with mortgage loans in all of the Continental United States.
Jeff Irving
National Mortgage Consultant
Direct: (866) 663-5461
Email: jeffirvingmlo@gmail.com
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