How Student And Car Loans Affect DTI For Mortgages

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this article, we will discuss and cover how student and car loans affect DTI for mortgages. 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 a mortgage. Some folks have auto loan payments that are either equivalent to or larger than their potential mortgage payment. Homebuyers who are in the process of buying a home and applying for a mortgage loan as well as an auto, I strongly recommend holding off on 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 consulting with a mortgage lender before making this decision in buying a new vehicle. If at all possible, try to avoid purchasing a vehicle until after closing on a mortgage loan.

How Student And Car Loans Affect DTI and How Much Home Buyers Can Qualify

Student And Car Loans Affect DTI

Auto loans have a big impact on debt-to-income ratios. Debt to income ratios when it comes to qualifying for a mortgage is calculated as follows. The sum of all the monthly payments which include:

  • Automobile loan payments
  • Minimum credit card payments
  • Minimum student loan payments
  • Amortized monthly student loan payments and/or 0.50% of the student loan balance
  • Other minimum revolving and installment monthly payments

The sum of the above monthly minimum payments reporting on credit bureaus is 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 the mortgage loan by $61,000 for a mortgage loan on a 3.25% mortgage rate 30-year loan. The reason automobile loan payments are so large is that most automobile loan programs are spread out over 3 to 5 years. This 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 underwriter will not count monthly automobile loans in your mortgage qualifications. Those who are co-signer on an automobile loan and can prove that they have not made the automobile loan payment for the past year can provide canceled. checks for the prior 12 months from the main borrower. If they do the above, monthly automobile loan payments will not count towards calculating debt to income ratios. Also, some lenders will not count monthly automobile loan payments if someone else has been paying for them for the past 12 months. This holds true as long as they can provide canceled checks and/or bank statements from the person paying the automobile loan.

How Student And Car Loans Affect DTI: How Auto Loans With Less Than 10 Payments Left Can Be Exempt From DTI Calculations

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

High Balance Student Loans

College and/or higher education can be quite expensive. Deferred student loans that have been deferred for more than 12 months no longer is exempt from mortgage debt to income calculations. Income-Based Repayment (IBR) counts on FHA and Conventional loans. Conventional and FHA loans allow IBR Payments reporting on credit bureaus: All lenders will calculate the following with student loans:

  1. 0.50% 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 a 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

IBR Payments Now Allowed on FHA and Conventional Loans

HUD, USDA, Fannie Mae, and Freddie Mac now allow IBR Payments on student loans. Mortgage Borrowers who need to qualify for mortgages with high debt to income ratios due to student and car loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] Gustan Cho Associates is a mortgage company licensed in multiple states with no lender overlays on government and/or conventional loans. Our team of loan officers at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.

How Student And Car Loans Affect DTI During The Mortgage Process

Tuition for colleges, universities, technical schools, and specialty schools has skyrocketed. It is almost impossible for anyone to get a higher education and degree without access to student loans. Tuition and fees at most private universities average $50,000 per year and $30,000 for state universities. With the high unemployment rate and underemployment rate, many recent graduates struggle to find work in their fields. A large percentage of them find jobs that are totally not related to their field of studies.

How Student And Car Loans Affect DTI For Borrowers with High DTI

How Student And Car Loans Affect DTI For Borrowers with High DTI

Most of those who have student loans have balances north of $50,000 while many others with advanced degrees have student loan balances in the six figures. It will take them mega years to pay their student loans. Unfortunately, student loan payments are treated the same as any monthly credit payment for anyone who is applying for a residential mortgage loan. Student loans will be used as part of their debt-to-income calculation. Deferred student loans for 12 months and longer are no longer exempt from FHA, USDA, and Conventional loans. However, deferred student loans that are deferred more than 12 months are exempt from VA loans. FHA, Conventional, and USDA  loans now do allow Income-Based Repayment. The good news is FHA and conventional Loans allow IBR Payments effective immediately.

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Student Loan Payments Reported On Credit Reports

For those who carry student loans, their student loan payments are reported to all three credit reporting agencies. One great advantage of VA loans is that as long as the student loans are deferred for at least 12 months, it is exempt from debt to income ratio calculations. Any student loan that is deferred for at least a year or more can be excluded for mortgage qualification purposes on VA loans. This is not the case with FHA, USDA, and Conventional loans. Conventional and FHA loans allow for IBR Payments.

Alternative Monthly Student Loan Payment In Lieu Of 1.0% Of Student Loan Balance

Lenders will take 0.50% of the student loan balance and use that as a monthly debt and use it to calculate borrowers’ debt to income ratio. The second option is to contact the student loan provider and tell them the following:

I am applying for a MORTGAGE. My lender needs a fully amortized monthly payment on an extended payment plan (which is normally 300 months/25 years)

This figure normally turns out to be 0.50% of the student loan balance. This figure can be used in lieu of the 0.50% student loan balance.

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How Student And Car Loans Affect DTI Case Study

How Student And Car Loans Affect DTI Case Study

Most people take out a student loan so they can better themselves by getting a degree from a college, university, or technical school. Statistics prove that the more education a person has, the higher paying job they can land. Here is a case scenario:

  • A person gets student loans in order to attend college with plans of graduating with a degree
  • They take out a total student loan amount of $50,000
  • Graduates with a degree and lands an above-average paying job
  • He wants to purchase a home
  • Contacts a mortgage lender to get pre-approved
  • The student loan information surfaces on his credit report but the student loan payment is in arrears and in collection
  • Homebuyer offers to get student loan current so he can qualify for a home
  • No can do

A person who has a federal student loan in collections or is in arrears in his or her payments, cannot qualify for a government mortgage loan until the student loan is in good standing. The federal student loan needs to be out of collections and assigned to a student loan provider and be in current standings. Federal student loans cannot be included in bankruptcy filings and cannot be discharged. All federal student loans are government loans and need to be paid.

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Deferred Student Loans And IBR Payments

As mentioned earlier, in the event the student loan has been in deferment for 12 or more months, the Federal Housing Administration no longer allows the student loan monthly payment to be excluded in income qualification. Income-Based Repayment (IBR) is no longer acceptable on FHA loans. Conventional loans allow Income-Based Repayment. As mentioned earlier, for borrowers with higher student loan balances that are in deferment, contact the student loan provider and get a fully amortized monthly payment over an extended term (which is normally 25 years). The fully amortized monthly payment can be used in lieu of 0.50% of the student loan balance. Borrowers do not have to change their student loan payment structure and can still leave it in deferment. We just need a what-if case scenario in writing.

How Student And Car Loans Affect DTI: Getting Hypothetical Fully Amortized Monthly Payment over Extended Term From Student Loan Provider

Gustan Cho Associates can help borrowers with getting this monthly amortized payment by doing a three-way conference call with the student loan provider. The team Gustan Cho Associates is a mortgage broker licensed in 48 states with over 160 wholesale mortgage lenders. Most of our wholesale lenders have no overlays on government and conventional loans. All of our pre-approvals are fully underwritten and signed off by our mortgage underwriters. We close 100% of our pre-approvals because our pre-approvals are full credit loan approvals/loan commitments. This is a huge benefit for those with higher debt-to-income ratios. Please contact us at 262-716-8151 or text us for a faster response. Or email us at [email protected]

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