How to get a mortgage when you have student loans

Buying a house is an exciting milestone; for some, it’s the pinnacle of the American Dream. But if you’re working to pay off a mountain of student loan debt, applying for a mortgage may seem impossible. This article will explain how to get a mortgage when you have student debt

Number of college-educated Americans who have postponed buying a house because of student debt

In fact, 41% of college-educated Americans have postponed buying a house due to their student debt, according to Realtor.com.

The good news is that there are options for those who feel overburdened by student loans. In the spring of 2017, Fannie Mae, a government-sponsored enterprise that securitizes mortgages, introduced some new policies to help student loan borrowers to buy a house.

There are also other things you can do to decrease your student debt burden to make buying a house possible.

Fannie Mae’s new rules

Here’s a breakdown of Fannie Mae’s new policies that can help certain student loan borrowers to buy a house or use their home equity to pay off student loans.

Prior to this, lenders had to use 1% of the outstanding loan balance as an imputed payment”

Income-driven repayment plans

Income-driven repayment plans make it easier for people with high student loan debt or low income to afford their monthly payments. But mortgage lenders weren’t allowed to use that low payment amount when calculating your debt-to-income ratio.

“Prior to this, lenders had to use 1% of the outstanding loan balance as an imputed payment,” says Casey Fleming, mortgage advisor and author of the “The Loan Guide: How to Get the Best Possible Mortgage.” The main reason is that, if you’re on an income-driven repayment plan, your monthly payments may go up or down each year depending on how your income and family situations change.

The problem, Fleming adds, is that “it’s common for student loan payments to be much less than 1%, so lenders were imputing a minimum payment in the DTI calculation that was much higher than the actual minimum payment.”

With the new policy, lenders can use the minimum payment as reported on the applicant’s credit report, which makes for a more accurate debt-to-income ratio.

Third-party payers

More and more employers are beginning to offer student loan repayment as an employee benefit. But when it came to applying for a mortgage, your monthly payments still counted against you if your employer, parents, or anyone else was paying down your loans on your behalf.

“Now, if the student can document that their parents or employer have been making the payment instead, then the lender may exclude that payment in the debt-to-income calculation,” says Fleming.

You generally need to prove third-party payments for at least the last 12 months to qualify to leave your payments out of the calculation.

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Pay off student loans with home equity

College graduates with student loans have always had the option to use home equity to pay off their student loans through a refinance. But before the new rule, this transaction was considered a cash-out loan and came with extra fees and possibly even higher interest rates.

With the new policy, however, borrowers will receive the same rate on the amount they use to pay off student loans as they would with the refinanced mortgage loan.

“Depending on circumstances, this can save the borrower anywhere from 0.3750% to 2.625% of the loan amount in upfront add-on fees,” says Fleming.

Other things to do to improve your chances

If the new Fannie Mae policies don’t affect you or you want to want to cover all your bases, here are some other things you can do to make it easier to get a mortgage with student loan debt.

Make sure your credit is in order

The better your credit report and credit score are, the better terms you’ll get on a mortgage loan. Even if you manage to improve your credit enough to get a small fraction of a percentage lower on your interest rate, it could save you thousands over a 30-year loan term.

Get a copy of your credit report through AnnualCreditReport.com, and get free access to your credit score through sites like Credit Karma or Discover Credit Scorecard.  If you see that there is room for improvement, work to build your credit for at least a few months before applying for a mortgage.

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Lower your debt-to-income ratio

How much debt you have is a big factor in determining whether or not you can qualify for a mortgage. Most lenders follow the 28/36 rule, which means that you should spend no more than 28% of your gross income on your monthly housing costs and no more than 36% on all of your debt combined (including the new mortgage payment).

It’s still possible to get a mortgage if you don’t follow this rule, but it could come with a higher interest rate, and you would be at a high risk of defaulting.

To lower your debt-to-income ratio, work to pay off smaller debts to get rid of their monthly payments. Even a small decrease in your monthly payments can make a big difference.

Work with a skilled loan officer

“The most important thing is to meet with a competent, ethical loan officer before you go mortgage shopping,” says Fleming. “Someone who understands underwriting and loan pricing can help the student optimize their chances of approval and optimize their circumstances for pricing, too.”

A good loan officer or mortgage advisor will have your best interests in mind and tell you what actions to take based on what’s best for you. For some, it may be to pay off debt, while for others it may be more important to horde more cash or simply rearrange their debt.

Take your time to research loan officers and mortgage advisors before choosing one. And don’t be afraid to “fire” them if you feel like they’re not meeting your needs or don’t have your best interests in mind.

Take your time to consider all your options

Buying a house is an exciting experience, and it can be easy to let your emotions guide you. Instead of rushing into it, however, take the time to consider every option that is available to you. When you’re mortgage shopping, be sure to compare several mortgage lenders to get the best rates and terms.

Take a look at your student loans, too. If there’s an option to refinance them to get a lower monthly payment, check out lenders that offer refinancing. Also, consider other ways to lower your student debt burden to make it easier to get approved, such as getting a side job.

A mortgage is a long-term commitment, so the more time you take now to make sure everything is in order, the more money you’ll save in the long run.

Seven in 10 college graduates in 2014 had student debt. The average undergraduate in 2014 walked away from college with roughly $33,000 in student debt, according to an analysis of government data by Mark Kantrowitz, publisher at Edvisors, a group of web sites about planning and paying for college. Even after adjusting for inflation, that’s nearly double the amount borrowers were looking at paying 20 years ago.

A recent Fidelity survey found 92 percent of recent grads plan on paying back their debt with income from their job, 25 percent are banking on financial help from their parents or family. Twenty-four percent will dip into their savings to foot their education bill while 21 percent plan on getting a second job to pay back student debt.

But 7 percent of recent graduates don’t plan on ever being able to entirely pay off their loans.

With a dismal job outlook and hope lost that they’ll shed the student debt monkey on their back, it’s no wonder college grads are defaulting on their loans. State default rates vary between 6 percent in North Dakota to a whopping 23.2 percent in Arizona. (Department of Education)

To help college grads avoid default, and the subsequent ding to their credit score, here’s a look at some lesser-known ways to repay those hefty student loans.

1. Consolidate Your Loans at StudentLoans.gov

StudentLoans.gov

Federal Direct Consolidation Loans are available to borrowers of federal education loans without regard to credit at StudentLoans.gov. “These are not like a traditional refinance, in that the interest rate is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a point,” says Kantrowitz. This more or less preserves the cost of the loans.

“It also provides access to alternate repayment plans, like extended repayment and income-based repayment, which may reduce the monthly payment by stretching out the term of the loan at a cost of more interest paid over the life of the loan,” says Kantrowitz.

2. Sign up for Sallie Mae’s Upromise Mastercard

Sallie Mae Upromise

Sign up for a credit card with loan-related discounts and credits, like the Upromise Mastercard, which links to a Sallie Mae student loan account. This helps pays down loans quicker by applying a portion of your savings to your Sallie Mae account. Learn how it works here.

Related article: The 10 Best Credit Cards For Students

3. Automate Student Loan Payments

Read Laptop

You may be eligible for an interest rate reduction if you make payments online rather than send them via snail mail. “Signing up for auto-debit, where monthly loan payments are automatically transferred from the borrower’s checking account can afford significant savings,” says Kantrowitz. Lenders typically provide a 0.25% or 0.50% interest rate reduction which can add up to hundreds or more over the life of the loan.

4. Volunteer with Zero Bound

Zero-Bound-Logo1

Programs like Zero Bound give grads struggling to pay off their student debt a much-needed reprieve. They reward college graduates who use their skills to help others by covering some of their student debt.

Zero Bound works with a range of graduates who, first determine an amount they would like to raise over a set period of time. Then the grad commits to a volunteer project. Participants recruit donors to help them achieve their fund raising goal, and Zero Bound also seeks out additional sponsors. Upon conclusion of the campaign, Zero Bound transfers the funds to the student loan company.

5. Crowdfund for Extra Student Loan Money

Crowdfunding

Generally crowdfunding from strangers is not successful. But websites such as Indiegogo, Gofundme, GiveCollege let family and friends chip in to help college grads gather money to pay off student loans.

6. Become a Public Servant

public-service-student-loan-forgivness

The Public Service Loan Forgiveness Program encourages new grads to make their world a better place. As a reward for not pursuing higher-paying careers, grads employed full-time by a federal, state, or local government agency, entity, or organization or a not-for-profit organization that has been designated as tax-exempt by the IRS under Section 501(c)(3) of the Internal Revenue Code (IRC) can have part of their loan wiped away. After making 120 full, on-time payments, those working the in following fields are typically eligible:

  • Emergency management, military service, public safety, or law enforcement services;
  • Public health services;
  • Public education or public library services, school library and other school-based services;
  • Public interest law services;
  • Early childhood education;
  • Public service for individuals with disabilities and the elderly.

7. Work in an Underserved Area

Volunteer

Forget about Wall Street. Seeking a job in underserved communities can speed up repayment of student debt. The Veterinary Loan Repayment Program pays $75,000 to eligible veterinarians who work for three years in areas lacking animal doctors. The National Institutes of Health will pay up to $35,000 a year in loans to qualified clinical researchers, and medical professionals can rake in up to $50,000 from the National Health Service Corps after two years working in underserved areas. Teachers can also reduce up to$4,000 a year of student debt through Teach Grant by spending four years working with students from low-income families.

The class of 2014 has a lot of economic hurdles to get over. Even if you didn’t just graduate, you can use the above methods to put a serious dent in your student loan debt. Go on, volunteer, join the Peace Corps, or at the very least, make sure you’re taking advantage of your student credit card rewards.