A major factor in getting a home loan is your debt to income ratio or DTI. To arrive at your DTI, a lender will take all of your monthly debt, and divide it by your gross monthly income. For example, let’s say you make $5,000 a month, and all of your month debt equals $1800, your DTI would be $1800/$5000 or 36%. Most loans have a maximum DTI limit of 43%.
So how does student loan debt play into this? In the past, lenders could exclude student loan debt if the loans were placed on hold (called deference). Now, however, that debt must be included no matter what and the method lenders use to calculate your monthly payment could mean the difference between qualifying for a loan or not.
The lender must use one of the options below to determine the repayment amount:
- the actual payment as documented in the credit report, by your student loan lender, or in documentation supplied by you;
- 1% of the outstanding balance;
- a calculated payment based on the documented loan repayment terms; or
- if the repayment terms are unknown, a calculated payment based on the current prevailing student loan interest rate* and the allowable repayment period shown in the table below.
The following table specifies the repayment period to be used when calculating a fully amortizing payment.
|
TOTAL OUTSTANDING BALANCE OF ALL STUDENT LOANS |
REPAYMENT PERIOD |
|
$1 — $7,499 |
10 years |
|
$7,500 — $9,999 |
12 years |
|
$10,000 — $19,999 |
15 years |
|
$20,000 — $39,999 |
20 years |
|
$40,000 — $59,999 |
25 years |
| $60,000 + |
30 years |
Note: The lender is responsible for determining that the payment on the credit report or other documents provided by the student loan lender or borrower are fully amortizing payments.
Calculating a Student Loan Repayment
Let’s look at two ways a lender could come up with your payment if the actual amount did not show up on your credit report.
Example
Balance: $37,000
Repayment Period: N/A
1% of Balance
Monthly Payment: $370
Balance: $37,000
Repayment Period: 20 years
Interest rate: 4.29%
Monthly Amortizing Payment: $229.91
So your monthly student debt could be calculated at $370 or $230. That $140 could make a world of difference. Let’s add the student loan debt to your monthly debt of $1800.
+ 230
$2,030
[spacer height=”20px”]DTI – 40%
+ 370
$2,170
[spacer height=”20px”]DTI – 43.4%
As you can see, in the second scenario, you have gone over the maximum DTI limit. But do not be discouraged. There are steps you can take to make sure your student loans do not hinder your ability to buy a home.
- Consolidation – If you haven’t already, see if you can consolidate your student loans if you have more than one. Most times you will end up with a lower interest rate and a lower payment
- Reduction – If you can, pay down or pay off other debt like credit cards or short-term. installments. Not only will that free up room in the DTI, it can raise your credit score as well, giving you more purchasing power.
- Exploration – If you are even remotely considering buying a home, now is the time to talk to lenders about all of your options. There are a number of different loan products out there and based on your specific circumstances (things like profession, location, and local, state and federal programs) there are a wide range of options that may suit your needs.
If you have any questions or want to know more about buying a home or real estate in general, please do not hesitate to contact us at Kees’ Realty.
Many thanks to Robert Jackson of General Mortgage Capital Corporation for contributing to this post.
*The “current prevailing student loan interest rate” can be found on a variety of websites.
Hi Denise, i like what you provide for student loan information to your prospects and clients. On the DTI u mention max 46%, this has changed. On Conventional financing if there’s a good credit score and other strong compensating factors, up to 50% DTI. BTW all of the debt would also include the PITI proposed mortgage payment for the back end debt to income ratio.
FHA loans can go above 50% DTI allowing more buying power.