Once you refinance your student loans, it may be time to think about buying a home. The first thing lenders check is your Debt-to-Income ratio (DTI). DTI is the way lenders measure your ability to manage the payments you make every month to repay money borrowed. This is calculated by comparing the amount of debt to your overall income.
In general, your housing should not exceed 25 – 28% of your gross monthly income. The lower your debt, the better; however, a good rule of thumb is to stay below 36%. In most cases, this is the highest ratio a borrower can have and still take out a mortgage, although some lenders will go as high as 43%. You can use Zillow or Bank Rate to calculate your DTI.
New student loan and mortgage lending guidelines are going into effect April 1, 2015 and may impact your ability to buy a home – if you have a variable rate loan. Lenders will now be required, regardless of the student loan payment status, to factor the greater of 1% of the loan balance or the actual documented payment into the total DTI for all conforming conventional loans.
How could this impact you?
Let’s take a look at a few examples assuming a variable rate student loan balance of $30,000. These rules will also affect you if you are not making fully-amortizing principal payments each month on your loans.
Example 1: The variable rate payment as reflected on your credit report is $165 per month. Lenders will be required for all applications submitted on or after 4/1/2015 to use the greater of $165 or $300 (1% X $30,000 = $300) when determining your DTI ratio.
Example 2: The variable rate payment as reflected on your credit report is $350 per month. Lenders will be required to use the greater of 1% of the loan balance (1% X $30,000 = $300) or the actual payment. In this case the actual payment of $350 would be used to determine the overall DTI.
There should be no impact of this new rule on those who refinance their student loans into a fixed rate loan. For those who opt for the rate savings of a variable rate loan, one important consideration – if you later apply for a mortgage loan – is that your DTI calculation will come out a little higher. This could make the difference in getting your mortgage approved. Of course, variable rate loans work best for those who have high incomes or a financial cushion to fall back on
Under the Consumer Financial Protection Bureau (CFPB) guidelines for Qualified Mortgages, borrowers must have a total monthly debt-to-income ratio, including your mortgage and all other monthly debt payments, of 43% or less. Lenders are reluctant to provide loans that fail to meet the CFPB’s guidelines.
It’s more important now than ever to begin thinking about reducing the amount of your student loan debt. Find Your Savings with Purefy and see how much closer you can be to your dream home.