In order to qualify for a mortgage, a loan officer has to identify the borrower’s current monthly debts and add that to the proposed payment to figure out what the DTI or debt-to-income ratio is. The first step is to run a credit report which tells the bank about all debts they need to be concerned with. Aside from other home loans borrowers might have, there are typically one or more of the following: credit card debts, student loans, car loans, and lease payments.
Student loans may become problematical. There is a very common misconception about student loans which are deferred. Many people think they don’t count as part of their monthly debt. But because the debt will likely be due during the life of the mortgage, the banks will include the deferred payment amount when calculating the DTI. Sometimes the amount will appear on the credit report and that is the number banks will use. At other times, the numbers won’t show up in the credit report. In that case, what happens?
Fannie Mae considers all student loans in the DTI, whether they are in deferment or not. If the student loans are in deferment, the borrower will need to provide a letter with the monthly payment amount when the student loan goes into repayment. If the borrower is not able to obtain a letter from the loan institution with the monthly payment, Fannie Mae requires the lender to use a minimum of two percent (and a lot of lenders require five percent) of the outstanding balance of the student loans as the monthly payment amount. Two percent is still more than what the actual monthly payment will be, and could disqualify a borrower from obtaining a mortgage. On the other hand, Federal Housing Administration (FHA) does NOT include deferred student loans, so in a scenario where the borrower has a significant amount of deferred student loan debt (like in the case of a lawyer who recently finished school) the only choice may be to go to the FHA.
What is the FHA?
It is the federal agency that provides mortgage insurance on loans made by FHA-approved lenders throughout the United States. FHA insures mortgages on single family and multifamily homes and is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception.
One of the biggest disadvantages of FHA loans is that they carry a monthly mortgage insurance premium (MIP), regardless of the amount of money given for the down payment, and also charge an upfront mortgage insurance fee. Most buyers add this to the loan amount and finance it, which means they pay interest and monthly MIP on this upfront fee. While conventional loans with less than 20 percent down charge monthly mortgage insurance, they do not charge an upfront fee.
Another disadvantage is that FHA loans offer the same interest rate and terms to all borrowers, regardless of credit history and score. There is no incentive or reward, such as better interest rates, for those who have put forth the effort to pay on time and properly manage their debt.
But for those who are stuck in certain situations, it pays to ask your lender if FHA is the answer.
Eli Garfinkel of Funding Resources Mortgage Company is available to answer any mortgage questions, without any obligation. Contact: mobile: 732.278.6526; office at 732.364.7373 ext. 22.; email [email protected].
By Eli Garfinkel
