Deferred student loans are a great way to get yourself through college without having to worry about finances, but once you graduate, they could be a thorn in your side. If you are trying to get a mortgage, your deferred loans will play a large role in your approval (or denial). Before you apply for a mortgage, you should know what to expect with your loans and the ways that you can help make your situation better.
What is a Deferred Student Loan?
A deferred student loan is a loan that is provided to you to pay your tuition or other school costs but that does not require payments right away. The postponement of your payments is determined based on your exact circumstances. A few of the reasons that students defer their loan payments is due to being enrolled in school at least half time with the inability to work enough to pay the loans and do well in school, unemployment, active military service or a particularly hard time financially. Every situation is different and the terms of the deferment also differ.
Deferred Loans on the Credit Report
The way that your student loans are reported on your credit report can be tricky. If you have multiple loans, despite the fact that they are for the same school/degree and with the same lender, they will report separately on your report. This could have a major impact on your ability to get a mortgage. If the multiple loans make it look like you have higher payments than you have, it will count against you on your debt-to-income ratio as the lender is required to use the amounts that are reported on your credit report, not the amounts that you state.
Conventional Versus Government Financing
As you determine the type of loan that you wish to apply for, you should consider how the different venues determine eligibility. FHA loans, for example, do not include deferred student loans in the debt-to-income ratio if the payments are deferred for more than 12 months. A conventional loan, on the other hand, includes all deferred loan payments and will require an estimate directly from the lender that holds your loan to ensure that the debt-to-income ratio is accurately reflected. In the event that you are unable to secure a letter from the lender that holds your student loan, the mortgage lender will figure the monthly payment at 5 percent of the principal balance, which is typically a rather high figure. If you have many loans or your debt ratio is already close to the limit, an FHA loan might be a better choice for you.
How to Reduce your Debt-to-Income Ratio
Most people are unable to pay their student loans in full in order to apply for a mortgage, but there are other options. The most popular choice is to consolidate the student loans into one payment. This will reduce the amount of interest that you pay and lower your overall monthly payment. This will help not only to get the loan paid off faster, but will also help you decrease your debt-to-income ratio, making it easier to qualify for a conventional loan if that is what you wish to obtain. If you are unable to consolidate your loans due to circumstances that are out of your control, the next best thing to do is to save enough money to have a larger down payment. This will also help you to lower your debt-to-income ratio because the less money that you need to borrow, the lower your monthly mortgage payment will be.
Deferred student loans do not automatically disqualify you for a mortgage, but they might take a little time to work around. If you have deferred loans, it is best to do your homework ahead of time; talk to your student loan lender to see what your estimated payments are calculated to be, pull your credit to see how many loans are reporting and estimate your own debt-to-income ratio to see where you stand. If you know ahead of time that the loans are going to cause you some difficulty, you can use one of the above resolutions to help you get the mortgage that you want.Click to See the Latest Mortgage Rates»