How Student And Car Loans Affect DTI When Applying For Mortgage

This BLOG On How Student And Car Loans Affect DTI When Applying For Mortgage Was UPDATED On January 12th, 2018

An auto loan is most likely the second largest payment consumers will have besides their mortgage payment. Student loans and auto loans are the two largest monthly debts that affect debt to income ratios when borrowers need to qualify for mortgage.

  • Some folks have auto loan payments that are either equivalent or larger than their potential mortgage payment
  • Home Buyers who are in the process of buying a home and applying for a mortgage loan as well as an auto, I strongly recommend to hold off in buying an automobile until after they have closed on their home loan
  • In the event home buyers really need to purchase a car prior to buying a home, I strongly recommend to consult with mortgage lender before making this decision in buying a new vehicle
  • If at all possible, try to avoid purchase a vehicle until after closing on mortgage loan

How Student And Car Loans Affect DTI And How Much Home They Can Qualify For

Auto loans has a big impact on debt to income ratios.

  • Debt to income ratios when it comes to qualifying for mortgage is calculated as follows:
    • The sum of all of monthly payments which include
      1. Automobile loan payments
      2. Minimum credit card payments
      3. Minimum student loan payments
      4. Amortized monthly student loan payments and/or 1.0% of student loan balance
      5. Other minimum revolving and installment monthly payments
  • The sum of the above monthly minimum payments reporting on credit bureaus divided by monthly gross income
  • Credit card minimum monthly payments are normally $25.00 per month
  • However, an average automobile loan payment can be north of $300.00 per month
  • A $300.00 monthly automobile loan payment will reduce mortgage loan by $61,000 for a mortgage loan on  a 4.25% mortgage rate 30 year loan
  • The reason automobile loan payments are so large is because most automobile loan programs are spread out over 3 to 5 years, which is a short term compared to mortgages which are amortized over 30 years

Exemptions On Not Counting Auto Loan Payments

There are certain exemptions where a mortgage loan underwriter will not count monthly automobile loan in your mortgage qualifications.

  • Those who are a co-signer on an automobile loan and can prove that they have not made the automobile loan payment for the past year can provide cancelled checks for the prior 12 months from the main borrower
  • If they do the above, monthly automobile loan payment will not count towards calculating debt to income ratios
  • Also, some mortgage lenders will not count monthly automobile loan payment if someone else has been paying for it for the past 12 months as long as they can provide cancelled checks and/or bank statements from the person paying the automobile loan

Auto loans that have 10 months or less left on payments will not count towards debt to income ratios mortgage qualifications.  However, if the auto loan is a lease, it will count towards debt to income ratios. Lenders view leases differently than purchased automobiles because once a lease is up, the leaseholder needs to lease another vehicle.

How Student And Car Loans Affect DTI: High Balance Student Loans

College and/or higher education can be quite expensive. Deferred student loans that has been deferred more than 12 months no longer is exempt from mortgage debt to income calculations. Income Based Repayment (IBR) no longer count.

All mortgage lenders will calculate the following with student loans:

  1. 1.0% of the outstanding student loan balance will be used as a monthly payment
  2. Or if the borrower can contact their student loan provider and ask them the following: ” I am applying for mortgage and my lender needs a fully amortized monthly payment over an extended term (normally 25 years): This figure turns out to be 0.50% more or less

Mortgage Borrowers who need to qualify for mortgages with high debt to income ratios due to student and car loans can contact us at The Gustan Cho Team at USA Mortgage at gcho@usa-mortgage.com. The Gustan Cho Team at USA Mortgage is a direct lender with no mortgage overlays on government and/or conventional loans. Our team of loan officers are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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