Student Loans & Mortgage Approval—DTI Issues

31 Replies

Hi Everyone, My name is Olivia, I’m a 24 year old college grad (Penn State ‘16) and like most of my classmates I have student loans ($45,000). I am trying to prepare myself to purchase a property for househacking in the next year or two (location TBD). However with my DTI ratio being unbalanced, I think get approved for a mortgage will be difficult. So my question is for those of you with student loans (or any other significant debt) how were you able to finance your property purchase? How did you prepare yourself? Just some additional info about me: I work a full time and part time job, I have a 6 year credit history, I’ve never missed a payment and I have a good credit score. Thanks! Olivia

@Olivia Umoren contact a good mortgage broker to help you get a long and short term game plan in place. If you have excellent credit and the only debt you have is student loans you should be ok. I cant say for sure since I dot know your score, your income and your total debt. if for some reason you dont qualify for conventional financing then seek out private money. Its a little more risky becasue its a higher % rate but as long as the project is profitable then you dont have much to risk. Once thing before you go that route is to be sure that you can refinance the investment once its up and running and cashflowing.  

@Alex Deacon Thanks Alex! Would you recommend talking to different mortgage brokers to get different perspectives or do people usually stick with one?

@Olivia Umoren I would take the approach a little differently. Here’s what I mean, instead of talking with different lenders try to fix the DTI issues first. So what’s your current income level and DTI? What is the interest rate on the student loans?

You can increase income or maybe refinance student loans. Conventional (most) lenders will lend up to 40-50 percent DTI. So that’s quite high.

$45k isn't too bad. I would start off with an income-driven repayment plan - see your loan servicer for more information. Other than that, you can do the 30-year graduated repayment plan. If you still have issues, I would look into either owner financing or rent to own deals. Lastly, you could rent and store cash reserves for a larger down payment, and this will reduce your DTI ratio. Also, you want to ensure your car and other miscellaneous loans you may have are paid off. You can tackle the smaller ones first to ensure your DTI is within underwriting limits.

Olivia, I can offer a few helpful tips on this based on recent research and rule changes.  The 1st would be to build credit by utilizing 2-10% (sweet spot) of available credit on your cards for a few to several months (to maximize your score) but two months before you apply for a mortgage pay all debt to $0.

The 2nd larger issue is the student loan and the 1st step would be to get copies of your tax returns ready and fill out the paperwork to get on the lowest payment plan i.e. Income Based Repayment, Income Driven, etc.  After a month or two, check your credit for free at CreditKarma and when the lower payments show up on your credit report, get ready to apply for your mortgage.

The 3rd step is to choose a bank or lender that is Fannie Mae backed because they recently changed the student loan rules to be able to use the lower payments shown on your credit reports as opposed to FHA's 1% rule or brokers that say they have to amortize your loan to calculate DTI.

With the lowest possible debt combined with Fannie Mae, at least for now in mid-2018 until the rules change, you should have the best chance at a DTI that can get you into a property. GOOD LUCK!

If anyone hears of any other financing that will accept the lower student loan payments in calculating DTI, let us know

@Olivia Umoren it can never hurt to get more than one perspective. Not only do you want to find the capital for your next deal but you want to start building relationships and your real estate team. Best of luck to you. Ever get to Pittsburgh look me up. I hear Boston prices are insane

Is there a way you can lower your current living expenses and pay down a lot of the loan debt in the next year or two before buying a house? You mentioned having two jobs so perhaps that could be feasible for you.

@Amy Beth i love your post. If everyone one could learn to live below their means, buy assets, shy away from instant gratification and have a little more financial discipline  we could all exit the rat race sooner than later. Thanks Amy

@Olivia Umoren Hi Olivia, contact a few Lenders to help you determine what you could qualify for. You may want to create an additional post requesting referrals from your fellow Boston Investors or wherever you plan on investing. I only know those in Pittsburgh. However I wish you the best and keep us up to date with your REI ventures. Thanks, Gary

@Olivia Umoren Start working on student loan first so you have right payment reported on your credit report.  Its important to show right amount on your credit report. 

I was in a similar situation and I currently use the repaye program and I have twice as much as you in student loans. I used a portfolio lender and bought a duplex near my hometown without any issues as a rental property, and I am now looking for another one. It is possible!

@Amy Beth I currently live at home and have been doing do since I graduated so I've been able to save money and pay down some debts. However, I do have a car note, insurance, student loans and a phone bill that I pay for every month. I am trying to cut down on my expenses though by making small changes like eating at home instead of going out, skipping some trips w/ friends, etc.

@James Galla The current plan I have is income-driven and I've been paying every month since 2016. I do have a car note though (roughly $12,000 left) and some, but not significant CC debt so I'm not sure how this would affect a mortgage approval. I can tackle the CC and car note in the next 2 years but I was more concerned about my student loans because as of now it's not feasible for me to pay off $45,000 (or even half) in two years w/ my current income.

@John Acheson Thanks for the info John! Currently working on getting my cc utilization down to 10% and I've been pretty disciplined with it. I'm on an income based repayment plan already and have been since 2016. They gave me a minimum $15/mo payment plan but I pay $100/mo because I can afford to pay more. Does me paying more than the minimum amount have a negative affect on anything? 

And would you recommend meeting with a mortgage lender or a mortgage broker? I worked in a bank for a few years during my winter and summer breaks at home and I was a floater so I was able to know everyone in my region and have a relationships with them. However, even w/ having the relationship I've heard that mortgage lenders work for the bank and mortgage brokers works for the customer. Let me know your thoughts!

@Olivia Umoren I also graduated in 2016 with ~$42K in student debt. I was given advice and a plan of action that I am currently working to getting my first multifamily that I will house hack within the next 2 years by my 26th birthday. That is my personal goal that I plan to accomplish. This is definitely a delayed gratification plan, but it can work. 

I have been living on the bare minimum for the past 22 months paying down my student loans to where now I am writing my last check this month! I'm pretty excited to get this off my back.

Before anyone comes at me with how this is not a wise decision given the time value of money and potential compound growth, just know I am completely aware that I could have invested this money at a higher interest rate and "put it to work" rather than paying down my 4.5% loans, but it was more of a freedom from this non asset-based debt that I was wanting to  get rid of. 

Now that I am debt free in my personal finances I will be working to get a decent lump some of 6 months of my current expenses built up by the end of this year so I will have the pockets to stomach a water heater going out or a leaking roof in my first home.

Then I can move on to saving a small down payment (I'm going the 3.5% FHA route) to get a multifamily home or home with a converted basement here in the Atlanta market for myself to live in one of the units and begin my investing career.

I hate that I haven't yet been actively investing but I'm also extremely proud of myself for clearing the debt and being able to move forward and be in a financial situation to leverage my money wisely in real estate before I begin.

So all in all within 4 years of graduating college I will be house hacking with no personal student loan debt.

There are a lot of smarter people than I on this site who have much more experience who may give different advice, but this was the plan that I really latched onto when I was reaching out about my first property 2 years ago. Now I'm almost to the finish line! Take this how you want.

Best of luck in all your endeavors,

Keaton  

@Harjeet Bhatti I'm on an income-based repayment plan and have been paying every month since 2016. For the first year I did $50/mo but this year I increased it to $100/mo. With me paying for the past 2 years, would lenders be more willing to approve me or does that matter?

@Keaton Roberson That's amazing! Thanks for posting this...definitely very motivating seeing someone the same age as me making it work. Honestly, clearing your student loan debt right now is a big accomplishment (in 2 years at that) so don't let anyone make it seem like you should've done something differently. Everyone's path is different and clearly you've set a great path for yourself!

Do you mind giving some details on how you did this? Do you live at home, have you delayed a car purchase, don't go out as much, etc.? 

@Gary Swank Thanks for this suggestion Gary, I will definitely make a post in the Boston forum. Thanks!

@Alex Deacon For sure! And yes, Boston prices are absolutely insane. My dad is a contractor and he works on some of the condos they have in Boston proper and the prices are enough to make your head spin. I'm definitely not looking to buy there at all...I'm looking in the suburbs and some of the surrounding areas so we will see what happens. Also planning on moving in the next year or two, not sure where to but I've been trying to get some info on the markets in the places I'm interested in.

@Olivia Umoren The same payment should be reported on your credit report. 

I love that you used the term "unbalanced" lol Of course your debt-to-income is unbalanced...hopefully it's leaning towards the right direction! Now a days, as lending guidelines loosen up a bit to make room for more buyers like yourself in stickier situations, debt-to-income guidelines have also followed suite. It really is hard to say, but you could possible get away with a debt-to-income ratio of 50% in some cases. That would include all of your outstanding monthly payments that show up on your credit report, including a proposed housing payment versus your total income. Obviously, being below 50% would be ideal. I would personally recommend you stay more around 36% to be safe- but that's just what I would do.  Oh and CONGRATULATIONS!!! Oh, and one more thing! I know some products that will actually let you count "expected" income from a rental property...meaning an appraiser will appraise it and also give an estimate of monthly income that the property would bring in that can actually be used towards your total income. Which, would definitely help out! 

Originally posted by @Olivia Umoren :
Hi Everyone,

My name is Olivia, I'm a 24 year old college grad (Penn State ‘16) and like most of my classmates I have student loans ($45,000). I am trying to prepare myself to purchase a property for househacking in the next year or two (location TBD). However with my DTI ratio being unbalanced, I think get approved for a mortgage will be difficult. So my question is for those of you with student loans (or any other significant debt) how were you able to finance your property purchase? How did you prepare yourself?

Just some additional info about me: I work a full time and part time job, I have a 6 year credit history, I’ve never missed a payment and I have a good credit score.

Thanks! Olivia

@Olivia Umoren So I was fortunate enough that my parents let me live for a year at home. I was having to commute over an hour each way to work so it wasn't ideal but I did get to save on not paying rent for a year. 

I also am a financial analyst as my day job so I laid out a pretty strict financial plan/budget for myself. Once I moved out I laid out a budget where I live on less than 50% of my take home pay and I was putting the rest towards my student loan debt. Now that I don't have payments I will maintain the same lifestyle and put the rest away in the bank for my emergency fund/down payments. This should only go up as my income increases and I maintain the same lifestyle. 

To your question about the vehicle: I personally have a paid Toyota Tacoma that I bought for $4K my senior year in college that has been very dependable (I personally have put over 35K miles on it). I don't personally plan to have a car note. I will probably just buy another cheaper vehicle if this one get damaged beyond repair.

I look forward to reading @Scott Trench 's book "Set For Life" that speaks on living below your means in a similar way.

I believe the key is to live as frugally as you can now and don't increase your living once your income increases and your wealth with grow exponentially from there. To steal a line from Dave Ramsey - "Live like no one else so later you can live and give like no one else". I think the delayed gratification route is pretty rewarding in that aspect.

That is great news that your living expenses is low. The car note will hurt your DTI and slow you down with saving for a house and paying off your school loans. I would save up to buy a cheap car for a few thousand dollars and sell your current car. If real estate is your priority I would get rid of the car as soon as you can replace it.

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