Do banks care about student loans for mortgages / cash out refi ?

Question

Greetings there

I am new to the real estate world

Unfortunately like many young folks I am saddled with a lot of student loan debt, hence my income to debt ratio is very bad

For those who have experience attaining mortgages and/or cash out refinances, how heavy do banks weigh in student loan debt?

I have good credit and my monthly obligations on the student loans are minimal (so paying them month to month is not an issue)

In particular I am more so thinking about potential cash out refinances and whether high student loan debt will handicap me

Thank you!

Jeff Shumway · Answer

Lenders use any debts that appear on your credit report as well as an recurring withdrawals from your bank account. Utilities do not count. If your student loans are in forbearance, lenders will use 1% of the outstanding balance to calculate your monthly payment for your debt to income ratio. If you have $10,000 in student loans that are in forbearance, then we would count $100 against your DTI.

To calculate your income, lenders use the gross pre-tax number. The max debt to income ratio for a conventional loan is 50%. For example, if you gross $10,000 every month, you would be allowed to max a maximum of $5,000 in monthly expenses (including mortgage for the property you're buying, student loans, credit card payments, any other installment debt, etc.)

Jeff Shumway · Answer

Hey Bryan, it will depend on a couple different factors. Are you looking to buy a primary residence or an investment property? If you are looking to buy an investment property, there are loan programs that do not look at your debt to income ratio at all. These are called DSCR (Debt service coverage ratio) loans. They only look at the anticipated rental income from the property, assets to make sure you have enough to down payment/closing costs, reserves (if applicable), and your credit. These are for investment properties only.

If you're looking at buying a primary residence, then yes DTI will come into play. You will definitely need to speak with a lender to see where you stand.

Reid Chauvin · Answer

If your student loans are not deferred then the lender will use the monthly minimum payment. If they are deferred then the lender can use 0.5% of the balance as the monthly payment amount. You can also request to be put on an income-based repayment plan which may help lower your monthly debt obligation for your student loans.

If you still can't qualify, then like others have said, Debt Service Coverage Ratio loan is likely your best bet. Just need a credit score of at least 600, enough funds for 20% down plus closing costs and pre-paids, and the appraised rental income on the property needs to at least match the projected mortgage payment.

Bud Gaffney · Answer

@Bryan Stats yes they do.

Sean McCluskey · Answer

@Bryan Stats You got it, they’re required to calculate your monthly debts as a percent of your gross monthly income.

Bryan Stats · Answer

Thank you again for another helpful responseI was thinking the banks look at your total debt vs your annual income for the debt to income ratio, however, it appears they are using your monthly obligation, which will be OK as I'm only obligated to pay 10% of my monthly income for the student debt

Jonathan R McLaughlin · Answer

run your own debt to income ratios...you said the loans were minimal and not burdensome so you are probably fine on a purchase. if the investment property is over 1.2 you probably help yourself. as to the refi, you shouldnt take out more than the property can support at 1.2 or better after appropriate reserves

Bryan Stats · Answer

Thank you all very much for the replies

What I had in mind were single family rental investments - Looks like I should go DSCR or private ?

Bruce Woodruff · Answer

Debt is debt, unless as @Jeff Shumway said, you're getting an investment property. Good news should be that because you invested so much in your future, you should have ample income to get any loan you need..... :-)

Timothy Hero · Answer

Go private. They don't look at income or DTI, but instead credit and cash flow of the rental.

Do banks care about student loans for mortgages / cash out refi ?

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