71 percent of non-homeowners with student loan debt say they’re postponing the purchase of a home because of those loans, according to a new survey from the National Association of Realtors and the SALT consumer literacy program. And it’s not just recent grads. In fact, older Millennials in the 26-35 age range, who typically carry $70,000-$100,000 in debt, are most likely to put off homeownership.
But how does student loan debt really affect a person’s ability to qualify for a mortgage? Let’s answer that question by explaining what lenders look for when determining eligibility.
Front-End Ratio
The front-end ratio, also called the housing ratio, is your estimated monthly mortgage payment, including taxes, insurance, and interest, divided by your gross monthly income.
Suppose your salary is $60,000 per year, or $5,000 per month, and your estimated mortgage payment is $1,400. $1,400 ÷ $5,000 = .28, giving you a front-end ratio of 28 percent.
The lender will establish a front-end ratio limit for conventional loans, often in the neighborhood of 28-36 percent. As of 2015, the maximum front-end ratio for FHA mortgages was 31 percent.
Obviously, the higher your income and down payment, the lower your front-end ratio and the better your chances of qualifying for a mortgage.
Back-End Ratio
This covers all of your debt as it relates to your income. In addition to your mortgage, this could include credit card minimum payments, auto loans, student loans and other debt. Add your monthly debt payments and divide the sum by your gross monthly income to get your back-end ratio.
Let’s say you have a $25 minimum credit card payment, a $200 car payment, and a $300 student loan payment. When adding the $1,400 estimated mortgage payment, that brings your total monthly debt to $1,925. $1,925 ÷ $5,000 (gross monthly income) = .385, giving you a back-end ratio of 38.5 percent.
The highest allowable back-end ratio for an FHA mortgage as of 2015 was 41 percent, so you would qualify for an FHA loan if all other requirements are met. However, qualifying for a conventional loan would depend on the maximum back-end ratio allowed by the lender. This can vary from lender to vendor.
What if Your Student Loan Payments Are Deferred?
A mortgage lender must factor in student loan payments even if you’re not currently making the payments (except on VA loans). You should also factor in these payments when setting a monthly budget. For example, a $2,000 mortgage payment may be manageable now while student loan payments are deferred, but will that still be the case when those payments kick in?
The Final Verdict
Yes, student loans can indeed make it more difficult to qualify for a mortgage, but not all cases are black and white. Maybe you need to look for a home in a different geographic area or reduce your budget. Maybe you need to hold off for a little while.
This is why the first person you need to speak with is a mortgage lender if you’re thinking about buying a home. If you’re not sure how student loan debt affects your eligibility, contact Greenway Mortgage. We’ll crunch the numbers for you and explain all of your options.
