by Brandon Scott
You did it! You have a really good job and enjoy where you work and the people, even during the pandemic. But you’re beginning to feel the pinch of your apartment and the walls around you. On the plus side, for now, you have one less monthly bill off your plate, your monthly student loan payment.
Or, maybe you’re “just employed” and you could really care less about the job but, you’re glad to be employed during a pandemic but, your apartment is small and you’re not exactly debt-free. Well, no matter where you fall, rest assured that we are all on the spectrum somewhere and, along the way, more and more people are faced with a common issue, student loan debt.
Right now, the Coronavirus Aid, Relief, and Economic Aid (CARES) Act provides a level of student loan forgiveness and no interest accrual on existing student loans. Even before this forgiveness was in place, many people stood before their mountain of student loan debt and allowed that to keep them from buying a home.
Many people allow the psychology of student loan debts to prevent them from proactively moving forward with the process of purchasing a home. If I may be so bold, you’re not exactly qualified to make that decision; hear me out. This should not be a decision that you allow yourself to make because every day a person with student loan debt closes on their new home. Inevitably, no matter what you think about your payments or finances, a lender is the only entity, traditionally, that will review the state of your finances and make a decision on what you qualify for. Think of it this way, all things being equal, you’ll qualify for something as long as you’ve hit minimum the 10,000 feet requirements – income, credit, and DTI.
In fact, a lender will look at your debt-to-income (DTI) ratio when considering your loan. The DTI allows the lender to see what percent of your monthly income goes toward your expenses.
Additionally, a lender will help you determine the loan type that is going to work best for you, government backed loan, like the Federal Housing Administration or a conventional loan. Remember that a lender is looking at the risk of making the loan, so they will also factor in your payment history and other variables. If you have steady employment, income and payment history (of debts) then, you’re probably in better shape than you think.
The approach you take depends on the type of student loan. Right now, many people are in forbearance or deferred so, “don’t go and change anything, right now”, advises Ryan Paquin, Branch Manager of First Home Mortgage and of the Paquin Team.
FHA requires that a lender use 1% of their student loan as debt in calculating DTI ratio, regardless of what the actual payment plan is or if it is deferred.
Conventional loans are, typically, easier to count the payment toward an individuals’ debt. Paquin says, ‘Conventional loans will use the actual payment amount. If it is deferred, you have to use the 0.5% for Freddie Mac or 1% for Fannie Mae.’
Now, we’re probably at the point that some readers are beginning to roll their eyes. And I get it, student loan debt can be really high. So, if you have high standard student loan debt then focus on increasing your credit score to qualify for a conventional loan, says Paquin. Many people try and solve the issues without a clear plan, and a lot of people may pull their loans out of deferment and get on an income-based repayment plan. This approach can help to reduce a persons’ student loan payment and qualify for a greater mortgage.
The approach that you take is all about the planning, this will sound familiar to my followers and subscribers. Creating a plan for the purchase of a home begins with understanding the “playing field”. What is it that you bring to the table, the good, the bad, and the baggage? Once all of the cards are on the table, a strategy can be put in place to tackle it, more importantly, you’ll be connected with the right resource(s).
Paquin adds that, ‘in Maryland, the State has a great program that will pay off up to $30,000 in student loan debt, at settlement. His response reinforces my most recent video on the Maryland Smartbuy Program. To qualify, you have to put 5% down, have a 720 credit score, and the remaining student loan balance has to be paid off by the $30,000 pay off.
Taking on the next steps to refinance your student loan can be a daunting task and, can come with its’ own set of risks. As mentioned, the CARES Act results in no interest accrual on Federal Student loan and suspended payments will apply toward loan forgiveness. However, before you make any decision, weigh the pros and cons by speaking with a mortgage lender, like Ryan, to establish a clear way forward to address your student loan debt.
Student loan debt impacts people nationwide and there are few pointed reviews of the subject that outline practical and pragmatic next steps. Fortunately, the team at Money.com put together a review of lenders that offer student loan refinancing.
Their piece discusses the burden of paying down student loans, while offering a resource and review of lenders that refinance student loans. In 2018, 54% of those students heading to college took out a student loan and will face the same or similar decision as you – what to do about my student loan debt? First, it’s vital to understand the terms and conditions of your financial hardship before moving forward. And, even if you’re not in a hardship, understand the terms of your loans and the impact of certain action on you – short- and long-term.
Money.com goes on to look at lenders, their minimum requirements, penalties, and interest rates. Personally, I appreciate their description of their methodology, or that lending institutions had to demonstrate or meet certain criteria, such as financial reputation via the Better Business Bureau, the Consumer Protection Financial Bureau, the Federal Trade Commission and the Federal Deposit Insurance Corporation. All of these entities are heavy players in the financial area and are essentially key performance indicators, or gauges of an financial institutions performance across a host of key sectors – from balance sheet to customer service. Be sure to check out that article for even more details about their picks.
The writing on the wall has been clear, 2020 is the year to buy or sale a home; even with a pandemic. Now is the time to begin the planning that will set you up for success, and it all begins with a call, text or email to me. Together, let’s peel back the layers and get you on the pathway to a place of your own.
Brandon Scott is a licensed real estate agent in Washington, DC, Maryland and Virginia. His license hangs with Coldwell Banker Dupont-Logan, DC. He’s been involved in the mortgage finance industry for the last 16 years in various fields. You can reach him by email at Brandon@bmscott.com. Subscribe to his YouTube Channel at RealTeaDMV