Can student loans affect your ability to qualify for a home loan? The short answer is yes. This is because the amount of money you pay in student loans each month impacts your debt-to-income ratio. As a reminder, your debt-to-income ratio — or DTI — is the percentage of your gross monthly income that goes to your monthly bills. The lower your DTI percentage, the better, because this means you have more money left over to devote to a monthly mortgage payment. However, a recent change in the guidelines for FHA loans makes it easier for homebuyers to lower their DTI — and in the process become better-positioned for a home loan. In short, student loans using .5% instead of 1% for monthly payments can make a huge difference. Want to know more?
How it Works
The aforementioned guideline changes on FHA loans now encourage those with student loan debt to lower the amount they have to pay each month in principal loan balance. Traditionally, the recommended amount has been 1 percent of the total loan balance, but now, the number has been cut in half to only .5 percent. This improves your DTI tremendously because you’re paying half of what you would have previously paid per month. With these savings, you’ll be closer to the DTI you need — typically around 36 percent — to receive loan approval from most lenders.
The Practical Application
Let’s say, for example, that you owe a student loan balance of $100,000. Using the 1 percent guideline, you would make a monthly payment of $1,000. Using the .5 percent guideline, that payment becomes $500. Sounds a lot more affordable, right? It truly is. But, more importantly, it gives those interested in an FHA loan a much better chance of being approved if they’re still paying on a student loan.
The Bottom Line
Want to discover some other ways to lower your DTI? Still a little unclear on how student loans using .5% instead of 1% can matter so much? Contact us at Fairway of the Carolinas, and one of our trusted mortgage advisers will explain everything. Our goal is to make sure you’re all set to ultimately secure the loan you need for the home of your dreams.
Copyright©2021 Fairway Independent Mortgage Corporation. NMLS#2289. 4750 S. Biltmore Lane, Madison, WI 53718, 1-866-912-4800. All rights reserved. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply. Equal Housing Opportunity. *Debt-to-income ratio is monthly debt/expenses divided by gross
monthly income. *Loan-to-Value (LTVs) and Combined Loan-to-Value (CLTVs) may vary by program requirements.