Can Student Loans Affect My Eligibility For A Mortgage?

Student loans have essentially become a fact of life for many Americans. A recent study claims that student loan debt has more than tripled since 2006. Tuition rates are on the rise, college attendance rates are increasing, and people are turning to loans, in addition to other forms of debt, to pay for schooling. According to the Federal Reserve, almost half of all young adults who go to college incur some form of debt. Student loans top the list as the most common debt type for those who have outstanding educational debt. 

While in school, many students choose to defer these loans, waiting to pay them off after they graduate. Those same students turned graduates, are going to begin looking at buying a home or finance other large purchases. With the average college student owing $37,000 in loans after graduation, understanding how these debts affect the chances of getting approved for a mortgage can help you better prepare. For Americans with student loans, having a repayment plan, borrowing responsibly, and making on-time payments can ensure your mortgage approval.

Important terminology

Student loans are confusing on their own, but understanding the language used to talk about them makes the process easier. We’ll discuss the common words associated with student loans and repayment throughout the article. 

• Delinquent vs. Default – Understanding the difference between delinquent accounts and accounts in default is a good place to start discussing student loans. 

• Your account becomes delinquent the first day you miss a student loan payment. Being delinquent isn’t great for your credit, but it isn’t a death blow. While your account is delinquent, you still have the option of setting up deferment options. However, after 90 days of being delinquent, your loan provider can report your delinquency to a national credit bureau. 

• An account that is in default is an account that has remained delinquent for over 270 days. Once your account reaches this point, it can have severe consequences to your credit and make it difficult for many years to regain your lost credit health. Being in default also can prevent the lender from being eligible for deferment.

Financial effects of student loans

In a TIME magazine article written by Senators Mark R. Warner and John Thune, they claim 44 million Americans are currently affected by student loan debt. It has become the largest sector of consumer debt and consists of over $1.6 trillion in total. With that many Americans suffering from such a large amount of debt, it’s necessary to know the economic effects these loans have on the individuals.

• Delinquent payments – Failure to keep up with payments leads to an overall lower credit score. Your credit score is just one factor for getting approved for a mortgage, but it is one of the more critical pieces of information used.

• On-time payments – One positive effect is seen from staying current on your student loan payments. For some, this is an easy way to boost your credit score and show consistent credit repayment history.

• Financial burden – Depending on the number of loans you’ve taken, the monthly repayment amount can cause a financial burden on your household. Moreso, depending on the diploma or certificate you graduated with, the earning potential could be lower. Racking up student loans to begin a profession that pays poorly could leave borrowers earning less than they need to pay off their debt. 

• Garnished wages – According to The U.S. Department of Labor, an individual’s disposable income can be garnished up to 15% to repay a federal loan that is in default.  

• Garnished Tax returns – In the same vein, your tax returns run the potential of being held when your student loans are in default. The Federal Student Aid website calls this type of withholding a “Treasury offset.”

Factors affecting mortgage eligibility

When determining whether or not you qualify for a mortgage, the lender will look at three main things. The fact of the matter is every single one of these metrics are affected by student loan debt.

1. Downpayment – The standard downpayment for a mortgage is 20% of the total loan. It’s not necessary for all loans, but it makes the application stronger. While student loans don’t seem to play a part in whether or not someone can put down 20% of their mortgage, their potential monthly repayment amount can make it harder for borrowers to save for a large downpayment, if they have residual student loan debt.
   
2. Debt-to-income (DTI) ratio – Your DTI is determined by taking your gross income and dividing it by your total debt monthly debt payments. The Consumer Financial Protection Bureau claims that applicants with a DTI of 43% or lower will most likely get denied. Understanding this concept is vital for individuals with student loan debt. If your repayment amount is very high, you may be rejected for mortgage loans, even if you satisfy the other requirements. 
   
3. Credit score – Your score gets calculated by credit history, spending power, payment history, and hard inquiry occurrences. This score gets reviewed for a multitude of things. When you apply for an apartment, a car loan, a new credit card, and for a mortgage application. As we discussed earlier, a student loan can help or hurt this score, depending on whether your monthly amount owed gets paid on time or not. It’s only one variable that determines your credit score, but it still makes a difference. 

Decreased homeownership

A recent study discusses the correlation between increased student loans and reduced homeownership. The authors admit that decreased homeownership is affected by more than just student loans, but they also can’t ignore the correlation between the two. 

Their research found that homeownership decreased by one to two percentage points when there was an increase of ten percent in student loan debt for a borrower. With the increase in national tuition rates, it’s easy to suppose this observation will see lower percentages of homeowners across the country.

In addition to the fact that student loan debt is proven to affect the chances of getting a mortgage, student loans, both private and federal, have some special rules other types of debts don’t have. Specifically, these types of loans are exempt from being eliminated by filing bankruptcy. An amendment was made to the bankruptcy code in 2005 to prevent the discharge of federal student loans.

Ways to lessen student loan influences

College students depend on student loans for many reasons, and newer generations have shown more dependency on them than past generations. With that being said, there are ways to limit the effects student loans can cause.

• Repayment plan – Having a repayment plan can help prevent any adverse credit affects student loans could incur. Loans can be deferred until you graduate, leave school, or drop below half-time enrollment. Getting in touch with your lender and creating a repayment plan can be vital to preventing any negative consequences of student loans.

• Responsible borrowing – A repayment plan ties into responsible borrowing, but responsible borrowing encompasses more than that. Borrowing only the necessary amount needed for school will make repayment easier. Understanding the rate of interest, when you need to begin payments, and understanding how long you will be paying on the loans are all aspects of responsible borrowing. Working with your lender to understand these aspects will make the repayment process much more manageable.

Borrow with confidence

Whether you go to a trade school or a traditional college campus, people who go to college have a better chance to be successful. Attending school comes with the understanding that a large percentage of attendees will incur some form of student debt. Whether you need a loan to cover tuition, living expenses, books, or any other cost, remember that loan will need to be repaid. Websites like Collegefinance.com are working hard to remove the confusion behind student loans.

Student loans can be a blessing once you understand how they affect you after graduation. Come up with a repayment plan, don’t borrow more than you actually need, pay your monthly payments on time, and you can rest assured those loans will affect your ability to receive a mortgage minimally.