By Doug Goelz, Mortgage Services
Hopefully, your student loans helped you get the education you need to get the job you want to earn the income you need to buy a home. When you apply for a mortgage, unless you have been lucky enough to pay off your student loans, lenders may assume you are making large monthly payments on your student loans even if you are in deferment or are making interest only payments.
Student loans appear on your credit report. Unlike almost all other kinds of debts, though, the student loan payments on your credit report can be misleading. In some cases, no monthly payment is shown, or a payment of $0 is shown with a notation that the loan is in deferment.
If your credit report includes a monthly payment for your student loans, then lenders will use that payment in your loan calculations.
However, if your credit report shows a payment of $0, and/or that the loan is in deferment, the lender will use the lower of the following as your monthly payment:
- 1% of the loan amount, or
- The fully amortized payment as calculated from the documented loan terms.
Let’s say you have a consolidated student loan for $100,000. The loan has 13 years remaining, the current rate is 7%, and your credit report does not show a payment. The lender will use the lower of $1000 (1% of the balance) and $978.07 (a fully amortized payment of $100,000 @ 7% for 13 years) as your presumed monthly payment on the loan.
If you already are making fully amortized payments on your student loans, the lender’s calculations may reflect your actual cash flow. However, if you are in deferment, or are paying interest only, the lender’s calculations may be considerably higher than you really are paying each month, and may significantly reduce your borrowing power from what your cash flow might indicate.
Questions? Feel free to get in touch with me at 415-730-4665 or [email protected]
