Many borrowers wonder if they’ll be able to get a mortgage if they’re still paying off their student loans. After graduating from college and landing a good job, you may feel that buying a home is the next step of your financial journey. Having student loan debt can make it difficult to qualify for a mortgage, but you may still have some options.
What’s a DTI Ratio?
When you apply for a mortgage, or any large loan, one of the things that lenders look at is your debt-to-income (DTI) ratio. Your debt-to-income ratio is all your monthly debt payments — from student loans to credit cards — divided by your gross monthly income. Lenders use this ratio to determine whether you’ll be able manage all of your existing debts, along with the monthly payments for a new loan.
How Do You Calculate Your DTI Ratio?
To calculate your DTI, just add up all of your monthly debt payments and divide that number by your monthly income. For example, suppose your gross income is $4,000 per month. And let’s say your credit card payments, car payment, and other debts run about $600 per month, with an additional student loan debt of $600 per month. That’s $1,200 in monthly debt payments, divided by $4,000 in gross monthly income, for a DTI ratio of 30%.
The Federal Housing Administration (FHA) standards for mortgages require a maximum DTI of 43%. So, in the example above, you are already more than halfway to the limit before you get a mortgage. In this example, you would only qualify for a mortgage with a total monthly payment of $520 or less, which means you would probably have a difficult time finding a home that fits within your budget.
Because of these challenges, government-backed mortgage lender Fannie Mae has introduced some policies and innovative solutions that could help some borrowers who are burdened by student debt.
• Debt Paid by Others: If you can demonstrate that specific debts—such as car loans, credit cards and student loans—have been paid by others for at least 12 months, this debt can be excluded from calculation. This could make a dramatic difference in your DTI ratio.
• Student Debt Payment Calculations: Previously, lenders were instructed to use a minimum of 1% of the outstanding student loan balance for their DTI calculation, as opposed to the actual payment amount. Using the actual payment, which could be significantly lower, may also improve your DTI ratio.
• Cash-Out Refinance: If you’re a parent who took out a student loan to help pay for your child’s education, you may be able to refinance your existing home loan and use the extra cash to pay off those student loans. The costs of cash-out refinancing have been lowered or eliminated, as long as the cash from the home equity is used to pay off student loan debt. According to Fannie Mae, there are an estimated 8.5 million borrowers who may benefit from this, especially parents with Parent Loans for Undergraduate Students (PLUS) loans.
While they may not be a “magic bullet” solution, these new policies could make the difference between buying and renting for some borrowers. To find out if they affect your situation, call us at 904-777-6000 or 800-445-6289, or visit your nearest VyStar branch. One of our Mortgage Loan Officers will be happy to help you look over the numbers and see what kind of mortgage you might qualify for.