Qualifying For Mortgage With Auto Loans And Student Loans

This BLOG On Qualifying For Mortgage With Auto Loans And Student Loans Was Updated On May 17, 2017

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

  • Home buyers who are interested in buying a new home, a new car loan can limit the amount of home they can buy 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 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 have.

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

Lets 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 and 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 and 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 this 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 which 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 includes housing payments, plus all other monthly minimum payments such as minimum credit card payments, automobile payments, child support payment, student loans, and other monthly installment payments. 

Mortgage With Auto Loans And Student Loans: 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
  • Only fully amortized monthly payments on an extended payment plan can be used for student loan payments to calculate debt to income ratios
  • If 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
  • VA Loans allow deferred student loans that has been deferred for more than 12 months from debt to income ratio calculations

 Debt to Income Ratio Calculations

  • On a monthly income of $3,333.33,  a mortgage 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 and dividing the borrowers monthly gross income which is $3,333.33 which yields 52.9% back end ratio which qualifies him without any problem.
  • Now, lets say that John Smith had an urge of buying a used Ferrari and 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 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 Mortgage With Auto Loans And Student Loans can often become a problem for home buyers with higher debt to income ratios. Home buyers 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 because it will count against both people when it comes to qualifying for 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. 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 which turns out to be 0.50% versus 1.0% of the student loan balance. For borrowers who have a high student loan balance and need a lender with no overlays on deferred student loans, please contact Gustan Cho at 800-900-8569 or text Gustan on his cell at 262-716-8151 for faster response. Borrowers can also email us at gcho@gustancho.com. We 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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