Your school debt plays a factor when considering your mortgage options:
You’ve been in school in some shape or form for the better part of the last 20 years, and unless your one of the fortunate few, you’ve no doubt accumulated a substantial student loan debt.
And now that you’re done with school and ready to enter the workforce, the time is nigh to start paying that debt back. You’re also no doubt looking forward to buying a home. Being aware of how your student loan debt impacts your ability to qualify for a mortgage will be vital to ensuring a smooth and pleasant mortgage transaction. Until recently, there were two viable mortgage options for new resident physicians– acquiring an FHA loan or a “doctor loan”. Due to recent guideline changes, qualifying for an FHA loan will now be nearly impossible. And it’s all due to student loan debt.
Recent changes to FHA: Regarding treatment of School Debt
Effective Sept. 14, 2015, FHA guidelines dictate that deferred student loan debt payments must be calculated into borrowers’ debt-to-income ratio. Even if loans are deferred or in forbearance, lenders must count a projected payment for DTI purposes. If the actual monthly payment is zero or unavailable, then lenders must use 2 percent of the balance as the monthly payment. So, if you have $100,000 in student loan debt, the minimum payment for DTI purposes would be $2,000. What does that mean, exactly? Consider this scenario: a first-year resident has a salary of $49,000 per year and no other debts than the $100,000 in student loans. FHA allows up to 49percent DTI (yes, 49!). Your monthly income equals $4,083.33. First we take out 49 percent, which leave us $2,000.83. Thn we take out $2000 for monthly debts, leaving you -$0.83 to spend on your housing payment!
Fortunately, you have another option – a Doctor Loan.
Doctor loans view student loan debt entirely differently from FHA and Conventional mortgages. And student loan debt is viewed differently depending on where you are in your career. We’ll start first with residents/fellows, and then take a look at attending physicians.
If you’re about to begin residency or fellowship, and you have student loans that are deferred or in forbearance, as long as those student loans are federally backed, they are not counted at all in the DTI calculation. There is one caveat, though. Guidelines dictate we don’t have to count student loan debt if repayment is more than 12 months from the mortgage the closing date. Federal loans give a six-month grace period before repayment. So if there is less than six months remaining your appointment, which means the repayment period begins in less than 12months, the debt must be factored in to DTI.
If you have some private student loan debt (from a bank or university), then the loan terms would dictate if it would be counted in your DTI. If the payment would have to be counted if the payment begins within 12 months of closing.
So under the same scenario as before – a first-year resident with a salary of $49,000 and $100,000 in student loan debt and no other monthly debt obligations – you would qualify for a doctor loan. Starting with $4,083.33, we take out 38-43% percent (DTI max. varies slightly between banks), leaving $1551.67 – $1,755.83 as the maximum allowable monthly mortgage payment. Depending on the property taxes and insurance costs, you would qualify for to purchase a home between $200,000 and $240,000.
If you have completed training and are set to become an attending, but your student loan repayments have not yet begun, then we would need simply need to verify what your student loan payments will be once the repayment period begins, and we would factor that number into your ratios.
Previously, acquiring an FHA loan made sense only if a borrower could not qualify for a doctor loan. FHA loans require a 3.5 percent down payment and mortgage insurance, whereas most doctor loans allow 100 percent financing and no PMI.
Now, a doctor loan is liable to not only be your best option, but also your only option.
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