It is no secret that student loans cause debt ratio issues when qualifying for a home loan. Per a recent Federal Reserve report**, student loan debt is rising at an alarming rate of $2,701 per second! As of January 2017, student loan debt is approximately $1.4 trillion. Obviously this is a wide-spread problem for many borrowers. While we don’t have a solution for this stat, we do have a great option for those with large amounts of student debt to become homeowners.
How to Buy a Home with Student Loans
As mentioned, we have a solution, but there are rules. Often mortgage loans will not count the low to no payment for student loans with Income Based Repayment (IBR). The norm is to count either 1% of the outstanding balance or use the fully amortized payment. This guideline disqualifies many buyers with debt because it creates a high debt to income ratio.
For example, owing $75,000 would mean a $750 payment (using 1% of the balance). So even if the required student loan payment in this example is only $50, lenders often count $750. Obviously, it is hard for many buyers to qualify with this level of payment among other debts.
However, there is a way to use IBR or reduced payments with the conventional loan offered through Freddie Mac. By the way, it works for refinancing too! As long as the student loans are NOT in deferment, forbearance, or have a zero payment, this program could be a solution for the potential buyer. Check out the advantages:
Benefits of Purchase Program with Student Loans
- As low as 5% down payment
- Down payment may be a gift
- Use minimum payment reported on credit report (this is huge!)
- No further payment documentation required
As mentioned, this option doesn’t apply to all borrowers, but these benefits should sound really good to many. If lenders have said that using the 1% payment calculator is an issue, then talk to one of our loan officers.
The benefits above can help first time buyers overcome a huge roadblock and can assist younger buyers with moving out of their parents’ home.
Additional Mortgage Options for Student Loan Debt
- Student Loan Payments and USDA No Money Down Loans
- VA Home Loans – Little Known Quirks to Get You Into a House (Including Student Loan Options)
** Consumer Credit (federalreserve.gov). As of January 2017. “The G.19 Statistical Release, “Consumer Credit,” reports outstanding credit extended to individuals for household, family, and other personal expenditures, excluding loans secured by real estate.”