Been Denied A Home Loan For Student Loans?

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Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
Loan Safe Mortgage
Jan 14, 2011
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San Diego, California
www.loansreduced.com
Recently the new guideline that has passed has requires that we use a liability even if the student loans are deferred. I’ve had a few people recently reach out to me in regards to this and would like to explain a few things in regards to the program, how it’s viewed and what alternatives you may have available.

Prior to this new change the guideline for student loans were as long as you could prove that you had a deferment longer than a year we were able to exclude that liability from your debt ratio. That would lead to us being able to qualify borrowers when now it is much more difficult. The reason this has changed is due to FHA, Fannie and Freddie noticing that the default rate on these loans are extremely high. At some point the student loans will become payable and if they’re not paid typically a garnishment is started depending on the lien holder.

How will student loans affect your ability to qualify for a home loan now?

Conventional Guidelines for Student Loans:
For all student loans, whether deferred, in forbearance, or in repayment (not deferred), the greater of the following must be used to determine the monthly payment to be used as the borrower’s recurring monthly debt obligation.
  • 1% of the outstanding balance used as a payment; or
  • The actual documented payment (documented in the credit report, in documentation obtained from the student loan lender, or in documentation supplied by the borrower.
If the payment being made cannot be documented or verified, 1% of the outstanding balance must be used.
Example: 100,000 student loan would calculate at 1000.00/mo – this is higher than 95% of car payments out there which can severely impact a borrower ability to qualify.

FHA Guidelines on Student Loans (for all case numbers after June 30th, 2016):
The mortgagee must include all Student loans in the Borrower’s liabilities, regardless of the payment type or status of payments.

If the payment used for the monthly obligation is:
  • Less than 1 percent of the outstanding balance reported on Borrower’s credit report, and
  • Less than the monthly payment reported on the Borrower’s credit report
The Mortgagee must obtain written documentation of the actual monthly payment, the payment status and evidence of the outstanding balance and terms from the creditor.

Regardless of the payment status, the Mortgagee must use either:
  • The greater of:
    • 1 percent of the outstanding balance on the loan; or
    • The monthly payment reported on the borrowers credit report; or
    • The actual documented payment, provided that the payment will fully amortize the loan over its term.
Synopsis: For both Conventional and FHA loans you’re unable to exclude the student loan debt even if it’s deferred for 3 years which has been a drastic change recently and caused many borrowers to not qualify when they normally would.

How can you get around this and still purchase a new home?
We do have a portfolio product available that will still look at student loans that are deferred and as long as you can provide proof of them being deferred for longer than 12 months at the time of funding the new loan we can help. The only advice I would give my borrowers is that the interest rate for this program is slightly above market rates and you want to make sure the new loan is affordable for a few reasons. The main reason would be you truly will never know when you’ll have the ability to refinance with the guidelines in place until the student loans are either paid off or paid down significantly (assuming you don’t qualify now). I would look at this new product as if it were something you may not be able to get out of anytime soon. If it makes sense, it makes sense.

Please feel free to contact us here at loansafe at 800-779-4547 or e-mail myself directly at [email protected]. I would be happy to discuss the different options available.
 
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HMPowers

LoanSafe Member
Apr 11, 2017
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I have to say "thank you" so much for posting this! I had absolutely no idea about this recent change & as a new Realtor, I was just discussing student loans & VA loans just this week with a potential buyer. This person is a family friend & I had mentioned that I believed you could have the loans not considered if they were in a situation of being deferred more than 12 months. I suspect she might not be able to qualify for the loan now. :(
 

Erik Sandstrom

Mortgage Expert - Call 1-619-379-8999
Staff member
Loan Safe Mortgage
Jan 14, 2011
2,113
182
63
San Diego, California
www.loansreduced.com
Thanks for posting HMPowers, I sincerely appreciate that. I'm typically ahead of the game with the guidelines that get released and take pride in making sure I educate as many people as I can about them. We all live in this ever changing industry and it's next to impossible to keep up. Don't forget, I am under the FDIC umbrella and can help people in 44 of the 50 states nationwide. :)
 
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HMPowers

LoanSafe Member
Apr 11, 2017
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Thanks! I absolutely will keep that in mind! Depending on how serious my potential buyers are right now, & whether I get my own loan mod approved, I will be paying those insane dues & joining MLS soon. :)