Student loans and mortgages qualifying – the questions that come up! Student loans can affect your credit score, they can also affect how much you can qualify for in a mortgage.
Student loans can impact your credit score several ways:
- Having an installment debt can improve your mix of credit
- Owing a high balance can harm your utilization ratio
- Missing or late payments (which can happen when there are deferral issues) harm your score, also you may make one payment but have several individual loans on your report, if you make one late payment, it may show as 4, 5 or more lates depending on the number of student loans.
Student loans are considered installment loans, so the credit utilization rules that affect credit cards don’t apply to student loans. However, if you are in deferment and then ask for a forbearance due to income or some other situation, the interest that would be paid during that time gets added to your student loan. This could mean that the amount you owe is now more than the original balance on your loan. This may affect your credit score.
How does your student loan affect your mortgage approval? It will depend on what type of loan you apply for and how your student loan is currently reporting on the credit report. If you are currently paying on your student loan, the credit report should reflect that payment. On conventional loans, we will use the payment on the credit report. For FHA loans, we will use the payment as long as it will pay off the loan within the amortization period. If not, we may need to use 1% of the loan balance.
For those that are in deferment, the credit report may not show a payment. In that case, we will usually have to use a payment of 1% of the loan balance. I will frequently hear clients say that they don’t have any debt, but truly you do have a student loan that will have to be paid back. A few years ago, we would have been able to eliminate the debt if the loan was deferred for at least 12 months after your first mortgage payment. That rule no longer applies. Now we have to use a payment – it does make sense, you are going to have to start paying on the loan at some point and you want to make sure you can afford both the new mortgage payment and your student loans. I have seen student loans in excess of $100,000 – 1% of that number is going to be $1000/month. That can definitely affect what you might qualify for in a mortgage.
A student loan can help your credit score as long as you make your payments on time. Just remember your lender will use the payment in qualifying. If you are income based repayment, we can use that payment on conventional loans, otherwise we will use a higher payment. Make sure your student loan payments are on time. Keep an eye on your credit report and talk to your lender about how they will affect you. Student loans don’t have to stop you from buying a home.
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
