Refinancing with Earnest
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When thinking about buying a home, you might be hesitant to take the first step. Sometimes certain things can keep us from moving forward.
One of the issues that could be holding you back is your student loan debt. About 41 percent of college-educated Americans with student loan debt say student loans are keeping them from buying a home.
Although it’s possible to get a mortgage when you have student loans, you should know your monthly debt payments can impact your ability to qualify for a mortgage.
Why mortgage lenders care about your student loan debt
Before approving you for a mortgage, a lender wants to know that you’ll make your payments.
You’re borrowing a huge sum of money to buy a home, and the lender is putting that money on the line. Although there are some protections for mortgage lenders if you stop making payments, they’re still taking a risk by providing the cash for you to buy a house.
When lenders consider your likelihood of repaying a mortgage, they look at your other financial obligations, including student loan payments. They look at how much of your income each month goes toward payments on your credit cards, auto loans, student loans, and other debt.
The percentage of your income going toward debt payments is your debt-to-income ratio (DTI). The more debt you have, the higher your DTI. And the higher your DTI, the more likely it is that you could begin missing mortgage payments if you run into trouble.
Student loan payments and DTI
Your DTI ratio is one reason that your student loan debt could be holding you back from a mortgage approval. DTI is a measure of how much debt you have relative to your monthly income. For example, if you make $4,000 a month and pay $1,000 each month toward debt, your DTI is 25 percent. That is, a quarter of your income is dedicated to repaying debts.
When applying for a mortgage, the size of your monthly student loan payment matters. “It is the monthly payment, not the total of the balances, that is taken into consideration when determining one’s eligibility for qualifying for a mortgage,” said Heather McRae, senior loan officer at Chicago Financial Services.
Even if you have a large balance on your student loans, it’s possible to qualify for a mortgage if you can get your monthly payments low enough to make your DTI acceptable. A 43 percent DTI is the highest a borrower can have and still get a Qualified Mortgage, according to the Consumer Financial Protection Bureau.
Example: Student loan impact on DTI
Let’s say you earn $4,000 a month, have a $350 car payment, and pay $200 a month on credit cards. You also owe $60,000 in student loans with a 5.7% rate for 10 years, and your monthly payment is $657.
You need to keep your DTI to no more than 43 percent. Using the $4,000 a month income from above, all of your debt payments together (including your potential new mortgage) can total no more than $1,720. Your car payment, credit cards, and student loan payments already total $1,207 each month. That means your mortgage payment can’t be more than $513 a month.
Depending on your market, you might be able to find a home that’s cheap enough to meet those needs. Many homebuyers, though, could have trouble finding a home that qualifies.
Refinance your student loans to lower your DTI
When you refinance your student loans, you replace your current student loans with a new loan. The new loan could have a lower interest rate and a lower monthly payment.
“It’s not a guarantee, but anything that will help lower your overall monthly payment will help,” said McRae. “Refinancing student loans will definitely help someone in qualifying to purchase a new home.”
If you use the example above, you can see how refinancing could potentially help when you plug the numbers into our student loan refinancing calculator. By refinancing that $60,000 debt to a 3.15% rate and extending your repayment to 15 years, you can lower your payment to $419 per month. Now, your mortgage payment can be up to $751 per month and you’ll still meet the 43 percent DTI threshold.
Refinancing your student loans can lower your DTI and help you qualify for a home. But there are some there downsides, too.
The biggest pitfall is the fact that you lose federal student loan protections when you refinance privately. If you want to qualify for income-driven repayment, for example, you shouldn’t refinance your student loans just yet.
Refinancing your student loans can also extend the amount of time it takes to pay off your student debt. That could cost you more money in interest over the life of your loan. Though refinancing could help you qualify for a home, carefully consider the consequences before moving forward with this option.
How refinancing affects your credit score
While refinancing can help you qualify for a mortgage from a DTI standpoint, you do need to be careful. “Refinancing your student loan will drop your credit score, for a little while anyway,” said Casey Fleming, a 30-year veteran of the mortgage industry and author of “The Loan Guide.”
Your refinanced student loan is a new loan that will show up on your credit report as recent debt. Because credit scoring models prefer older debt, said Fleming, a new loan can ding your score a bit.
When deciding whether or not to approve you for a mortgage, lenders look at your credit score. If it has dropped, you might have a harder time qualifying. The good news is that the drop is usually only temporary; your score should recover within a few months after refinancing student loans, as long as you maintain good credit habits.
If you plan to apply for a mortgage, refinance your student loans ahead of time to make sure you have time to recover from the credit hit. Fleming suggested talking to a mortgage advisor before making any moves to refinance student loans. Check your DTI and talk about options with a knowledgeable professional. If you don’t have a debt ratio problem, refinancing student loans might be unnecessary.
New guidelines from Fannie Mae
Refinancing your student loans might also be unnecessary if someone else is making payments on your debt. Fleming pointed out that mortgage servicer Fannie Mae recently changed its guidelines. Now, if someone else is making payments on your credit cards, car loan, or student loans, it won’t be considered in your DTI.
This changes the game a little bit. However, refinancing your student loans can still help, if only because of the potential to save you money in interest over time. Whether you hope to qualify for a mortgage or you just want to save money, consider your situation to see if refinancing is the right move for you.
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Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
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|2.47% – 5.87%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.80% – 6.22%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.57% – 8.17%6||Undergrad & Graduate||Visit Citizens|