Mortgage With Auto Loans And Student Loans And Effects On DTI

This Article Is About Mortgage With Auto Loans And Student Loans And Effects

Homebuyers Qualifying For Mortgage With Auto Loans And Student Loans can run into issues due to debt to income ratio.

Homebuyers who are interested in buying a new home, a new car loan can limit the amount of home they can buy:

  • This is due to the short amortization schedule on auto loans

Most car loans are amortized over three to seven years:

  • So car payments will range anywhere between $200 to $700 per month

The balance of the car loan does not matter:

  • It is the monthly payment that matters and is used for debt to income ratio calculations on mortgages
  • An average $300.00 monthly automobile payment can reduce $65,000 worth of buying power
  • Student Loans are also a common hurdle when it comes to qualifying for a mortgage
  • Most home buyers with student loans have high student loan balances

Qualifying For Mortgage With Auto Loans And Student Loans are two of the biggest hurdles borrowers with high debt to income ratios.

Qualifying For Mortgage With Auto Loans And Student Loans Affects Home Purchase Buying Power

Let’s take an example.

  • John Smith makes $40,000 gross income per year and he wants to qualify for a mortgage loan
  • He has two credit cards
  • His monthly minimum credit card payments are $200.00 per month for both credit cards
  • He has stellar credit scores and no prior bankruptcies, collections, foreclosures, or judgments.   
  • What is the mortgage amount John Smith qualifies for?
  • We  first need to calculate the monthly income of John Smith
  • This is calculated by taking gross annual income and dividing it by 12 months so you get a monthly gross income
  • The monthly gross income of these borrowers is $3,333.33
  • The front end debt to income ratio needs to be no greater than 46.9% and the back end debt to income ratio cannot be greater than 56.9% to get an approve/eligible per Automated Underwriting System for borrowers with at least a 620 FICO credit score

The front end debt to income ratio of 46.9%  is called the housing ratio:

  • Front end DTI includes principal, interest, taxes, and insurance
  • The back end ratio is the housing front end ratio plus all other minimum monthly expenses divided by the borrower’s monthly gross income

The back end ratio is the combined total monthly debts which include housing payments:

  • Pus all other monthly minimum payments such as minimum credit card payments, automobile payments, child support payment, student loans, and other monthly installment payments

In this article, we will discuss and cover Mortgage With Auto Loans And Student Loans And Effects On DTI.

Mortgage With Auto Loans And Student Loans On Deferred Student Loans

FHA has changed its FHA Guidelines On Deferred Student Loans :

  • According to HUD Guidelines, Deferred student loans are no longer exempt from debt to income ratio calculations
  • IBR (Income-Based Repayment On Student Loans) no longer can be used on FHA Loans
  • Fannie Mae and Freddie Mac allow IBR Payments to be used on conventional loans
  • Only fully amortized monthly payments on an extended payment plan can be used for student loan payments to calculate debt to income ratios on FHA Loans
  • If the borrower cannot get a fully amortized monthly student loan payment, then 1.0% of the outstanding student loan balance is used as a monthly debt on FHA Loans

VA Loans allow deferred student loans that have been deferred for more than 12 months from debt to income ratio calculations.

 Debt to Income Ratio Calculations

How to calculate the debt to income ratio

On a monthly income of $3,333.33, the borrower can theoretically afford a monthly housing expense of $3,333.33 x 0.469% which yields $1,563.33 per month:

  • This mortgage payment would include principal, interest, taxes, and insurance
  • For the back end ratio, his total monthly expenses are $1,563.33 mortgage + $200.00 credit card payments which would yield $1,763.33
  • Now the back end ratio is calculated by taking the housing payment plus all other monthly debt payments which is $1,763.33
  • Dividing the borrowers monthly gross income which is $3,333.33 which yields a 52.9% back end ratio which qualifies him without any problem

Now, let’s say that John Smith had an urge of buying a used Ferrari:

  • His monthly car payment was $700.00 which in his opinion he can easily afford because he is single without any dependents

His new back end ratio will be his total monthly debt payment which is $2,463.33:

  • which was the previous monthly debt payments of $1,763.33
  • plus his new Ferrari payment of $700.00
  • and dividing it by his monthly gross income of $3,333.33 which yields a 74% back end ratio

This borrower will no longer qualify for a home loan if he were to have an additional $700.00 a month car payment:

  • The $700.00 per month car payment is equivalent to a $140,000 mortgage payment

Qualifying For A Mortgage With High Student Loan Balances

Qualifying for Mortgage With Auto Loans And Student Loans can often become a problem for homebuyers with higher debt to income ratios.

  • For homebuyers who are planning on purchasing a home in the near future, the best advice I can give is to hold off on buying a vehicle until they close on their home loan
  • Also, for people who are married, never put a car loan under both people’s name

This is because it will count against both people when it comes to qualifying for a mortgage.

How To Get Monthly Amortized Monthly Payment On Student Loans

Many loan officers still do not understand that they can use a theoretical amortized monthly payment on a student loan over an extended payment plan such as 25 years.

  • With FHA Loans, Loan officers just take 1.0% of the total outstanding student loan balance instead of using the amortized monthly payment amount over an extended student payment term
  • This turns out to be 0.50% versus 1.0% of the student loan balance on FHA Loans

Conventional Loans Allow IBR Payments.

VA Student Loan Guidelines

What are the VA Student Loan guidelines

VA Loans, the following formula is used:

  • VA exempts deferred student loans deferred longer than 12 months
  • Non-deferred student loans, VA requires underwriters to take an outstanding balance and multiply it by 5%
  • Take that figure and divide it by 12 months
  • The resulting number is used as the hypothetical monthly student loan debt on VA Loans

Borrowers who have a high student loan balance and need a lender with no overlays on deferred student loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Borrowers can also email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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