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Are Your Student Loans Stopping You from Qualifying for a Mortgage?

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Are Your Student Loans Stopping You from Qualifying for a Mortgage?

When you were filling out financial aid applications to help cover your college tuition you probably did not give much thought to how your student loan payments would affect your budget once you graduated. You almost certainly never contemplated how your student loans might impact your credit when you were ready to apply for a mortgage. However, whether you considered the ramifications ahead of time or not, the reality of the matter is that your student loans can sometimes make or break your ability to qualify for a home loan even if your loans have never been paid late or are currently in deferment.

If you are preparing to apply for a mortgage or are already struggling to qualify for a mortgage because of the student loans on your credit reports, the good news is that all hope is not necessarily lost. In fact, depending upon your situation there may even be a few different ways to solve your qualification problems. Take a look...

DTI Problems

Buying a home when you have outstanding student loan debts can certainly be a challenge for multiple reasons. One of the first ways that student loans can make it difficult for you to purchase a home is due to the fact that the amount of these loans will usually be counted against you when you apply for a mortgage. As a result your debt to income ratio (DTI) will increase, causing the amount you qualify to borrow to be reduced. Sometimes these DTI issues can make it impossible to qualify for the home you really want to purchase.  

Student loans may cause you DTI issues even if the loans are currently deferred. (Before you graduate and often for certain periods of time after graduation your student loans may be placed into a deferred status - that is to say that your payments are temporarily placed on hold.) Unfortunately even if you are not currently making a monthly payment on your student loans some portion of the debt still may be counted against your income when you apply for a mortgage loan and the lender calculates your ability to make a house payment.

Potential Solution #1: Consolidation

When you consolidate multiple student loans into a single new loan you can often lower your monthly minimum payment. Assuming that you are eligible to lower your payments through consolidation, consolidating those loans offers you a potential solution to lower your DTI thus enabling you to qualify for a larger loan amount.

Additionally, when you consolidate your student loans your credit scores might even see a small upward bump as well. By consolidating multiple student loans you can reduce your overall number of accounts with balances. Since FICO's credit scoring models pay attention to your number of outstanding debts, consolidating could certainly be a positive move for your credit.

 Credit History Problems

If you have not always made your student loan payments on time you may have another obstacle to try to overcome when you fill out a mortgage application. Unfortunately, if your loan payments are not current then they may put the brakes on you purchasing a new home entirely. Qualifying for a mortgage while your student loans are past due is going to be nearly impossible.

Naturally the easiest way to solve this problem is to pay to bring your loans back to current status if you can afford to do so. However, if your past due student loan debt is too high for you to pay off in one fell swoop, rehabilitation may be an option for you to consider.

Potential Solution #2: Rehabilitation

You may be able to eliminate the default status on your student loans and move those loans from collections back to current on your credit reports by entering into a rehabilitation program. To enter into the loan rehabilitation program you must agree in writing to make 9 consecutive monthly payments (each within 20 days of the due date). The size of your monthly payments will be based upon your income and a variety of other factors.

Once you have completed your rehabilitation payments successfully, your loan should be eligible to be removed from default status and should resume being reported on your credit as a current loan. Unfortunately, any late payments previously made on the loan before the account went into rehab will remain on your credit reports where they may continue to damage your credit scores accordingly for up to 7 years. As a result, during your loan rehabilitation process it would be wise to look into other ways to try to improve your credit - either on your own or with the help of a reputable credit expert.

DIY or Professional Help?

If you like so many millions of other Americans took out student loans to help finance your education then learning the best ways to manage that debt after graduation is a essential to your financial and credit wellbeing. You can try to figure out the best way to manage your loans by yourself or you can work with a pro. Naturally you have the right to try to consolidate or rehabilitate your student loans with your lender completely on your own (just like you have the right to try to repair your own credit or even attempt to perform your own vehicle repairs). However, just like DIY credit repair or auto repair may be an extremely difficult and inadvisable project, so can trying to resolve your student loan issues without professional assistance.

Remember, student loan servicers are supposed to help graduates by making sure that you are well aware of all of the different options you have available. Your loan servicers should be telling you about consolidation options, rehabilitation options, and even loan forgiveness options. However, the truth is that most of the time they do not. (Would a lender really be motivated to help you pay a smaller monthly fee even if the option is available to you?) By hiring a reputable student loan expert to assist you there will be someone on your side, guiding you step by step through finding your best loan repayment, rehabilitation, or forgiveness options and even filling out the paperwork to apply for these programs on your behalf.

CLICK HERE if you would like to have a student loan relief expert reach out to you today. 

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

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New Changes Coming to Your Next Mortgage Application: Trended Data

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New Changes Coming to Your Next Mortgage Application: Trended Data

Planning to apply for a mortgage in the near future? If so you should be aware of some major changes on the horizon in the mortgage world which might impact your next application. At the end of June, 2016 Fannie Mae will be adding a new element of credit data to be considered by their automated underwriting system, Desktop Underwriter (DU Version 10.0). The new element which DU will consider the next time you apply for a mortgage is known as "time series data" or "trended data."

What Is Trended Data?

According to Fannie Mae trended credit data is "expanded information on a borrower's credit history at a trade line (credit line) level [based] on several monthly factors, including: amount owed, minimum payment, and payment made." More simply phrased, trended data is a just a list of your account management information which allows lenders to see a chronological history of your credit card balances, payment amounts, and minimum payments over a series of time (2 years to be exact).  This historical payment data shows lenders whether you are a credit card balance transactor (someone who pays off her credit card balances monthly) or a credit card balance revolver (someone who does not pay off her credit card balances monthly and instead revolves a balance from month to month).

Why Does Your Mortgage Lender Care about Trended Data?

Credit reports and scores are products, sold by the credit bureaus and FICO (among others), which serve the purpose of helping future lenders predict the risk of doing business with you. If your credit reports and scores show lenders that you are a high risk borrower (aka you likely will not pay your bills on time) then future lenders may either turn you down when you apply for a loan or may charge you a higher interest rate to offset the risk they are taking.

Before trended data was featured on credit reports mortgage lenders (and any other lender for that matter) could not truly tell whether or not you made the habit of paying off your credit card balances in full each month or not. They could only see a snap shot of your current credit card balances.

Your historical payment data is important to lenders because it allows them to more accurately predict the risk of loaning you money. If your credit reports show that you pay off your credit card balances monthly then you are without question a lower risk borrower than someone who revolves credit card balances from month to month. Adding trended data to DU's risk assessment process allows mortgage lenders to more accurately predict risk.

Will Trended Data Impact Your Credit Scores?

At present trended data is only being considered by Fannie Mae's DU system when you apply for a mortgage. The data is used to help mortgage lenders using DU to predict risk, but it will not have any impact upon your actual credit scores at this time. Trended data is not considered in the calculation of your credit scores currently, but in all likelihood it is only a matter of time before trended data will have an impact upon your credit scores. Trended data is a powerful predictor of risk. You should expect to see it used more widely in the years to come.

Your New Pre-Mortgage Game Plan

In the past the best way to prepare your credit for a mortgage was to pay your bills on time, maintain credit reports which were free from derogatory information (i.e. collections, public records, etc.), and to pay off your credit card balances. However, since trended data shows lenders a 24 month window into your historical credit card payment habits, paying off your credit card balances 30-60 days before a new mortgage application simply is not going to cut it in the future.

(Need help preparing your credit for a mortgage? CLICK HERE to schedule a no-obligation credit analysis with a HOPE4USA Credit Expert today.)

As mentioned previously, mortgage giant Fannie Mae will begin considering trended data in the mortgage application process at the end of June, 2016. GSE Freddie Mac has also expressed an interest in eventually considering trended data as well. What this means for you is that with the consideration of trended data quite possibly thrown into the mix for your next mortgage application the truth is that the habit of revolving credit card balances from month to month could certainly cost you more money on your next loan and (in cases of borderline approval) could even potentially prevent you from being approved for a mortgage at all.

It has always been important to pay your credit card balances off monthly, both from a credit and a financial perspective. Yet it is now more important than ever to make and execute a plan to eliminate your credit card debt. That plan may include dipping into your savings, taking out a consolidation loan, or using the snowball method to wipe out your credit card debt as quickly as possible. Regardless of the exact method, it is important to stop feeling overwhelmed by your credit card debt and to start taking action. Remember, failing to plan really is as good as planning to fail. 

michelle-black-credit-expert

Michelle Black is an author and leading credit expert with over 13 years of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here. 

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Foreclosure? Bankruptcy? You Might be Able to Purchase a Home Sooner Than You Think

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Foreclosure? Bankruptcy? You Might be Able to Purchase a Home Sooner Than You Think

Qualifying for a mortgage loan can be a daunting task, especially for consumers with certain types of credit problems such as bankruptcy, foreclosure, or short sales. Even if a consumer is able to rebuild his credit scores to a high enough level to satisfy a lender after one of these events (no small order), he may still be turned down for a loan until enough time has passed since the derogatory credit event before a lender will approve him for a new mortgage loan. The reason why consumers in these situations can be turned down for a mortgage even if their credit scores meet the minimum score criteria is due to the existence of mandatory waiting periods.

Not sure what your credit reports and scores look like? CLICK HERE.

Normal Waiting Periods

Fannie Mae, the government-sponsored enterprise (GSE) which is the leading source of residential mortgage credit in the United States, is slower to purchase the home loans made by lenders when certain types of credit issues appear on a borrowers' credit reports. These problematic credit issues include bankruptcies, foreclosures, and foreclosure alternatives such as short sales and deeds-in-lieu of foreclosure. When these specific credit issues occur Fannie Mae requires that a mandatory waiting period be instituted so that there is a cooling off period between the time when the major credit issue occurred and when the consumer will be eligible to qualify for a new mortgage loan in the future. Lenders have to abide by the guidelines set forth by Fannie Mae if they want the ability to sell the loans to Fannie Mae instead of being forced to hold the loans on their own personal balance sheets.

Mandatory waiting periods vary based upon both the derogatory credit event which occurred (i.e. bankruptcy, foreclosure, etc.) and the type of loan for which a consumer is applying (i.e. FHA, VA, USDA, or Conventional). If a consumer has a foreclosure on his credit reports, for example, then in many circumstances he could be required to wait up to 3 years before he is eligible to qualify for a new government-backed loan (i.e. FHA, VA, or USDA) and possibly up to 7 years prior to qualifying for a conventional mortgage.

Fannie Mae routinely adjusts mandatory waiting periods for loan programs so it is always best to check with an experienced loan officer to find out the specific wait period required for the mortgage loan program which interests you. Plus your loan officer will be able to help you determine if your situation qualifies for a reduced waiting period based upon certain "extenuating circumstances." (Don't have a loan officer? EMAIL US if you would like a referral to a loan officer we know and trust.)

FHA Back to Work Program - Extenuating Circumstances

HUD's announcement of the new FHA Back to Work Program in 2013 was very good news for consumers who experienced negative "economic events" which lead to a foreclosure, short sale, deed-in-lieu of foreclosure, or had filed for bankruptcy protection from their creditors. Thanks to the program, consumers who find themselves facing one of the situations above may be able to qualify for a new mortgage after a shortened waiting period. Qualified borrowers under the new program could be eligible to receive a new mortgage loan after as little as 1 year has passed since their derogatory credit event.

Who Qualifies?

In order to qualify for the Back to Work program consumers must be able to document the following.

1. Borrower must meet FHA loan requirements for "satisfactory credit."
2. Borrower can document the mortgage or credit problems resulted from a financial hardship.
3. Borrower has re-established a responsible credit history.
4. Borrower has completed HUD-approved housing counseling.

To qualify for the program a consumer must have credit reports and credit scores which meet the minimum requirements for approval set forth by both FHA and the lender. Next, he must be able to provide documented proof (i.e. tax returns) which demonstrates that he experienced an income reduction of 20% or more for a period of at least 6 months which lead to his derogatory credit event (i.e. bankruptcy or foreclosure). He will also need to demonstrate that he has recovered financially from the event as well. Additionally, the consumer will need to have at least a 12 month history of on-time rental payments and a 12 month credit history which is free from late payments as well.

Your Next Step

If you have taken the necessary steps to rebuild your credit after recently experiencing one of the derogatory credit events above, then you may be ready to meet with a loan officer to see if you qualify for a new FHA mortgage loan under the Back to Work Program. (Remember, if you are not already working with a loan officer you can EMAIL US if you would like a referral to a loan officer we know and trust.)

However, if you already know that you credit reports need some work before they will be clean enough to qualify for a mortgage then it is likely best for you to begin by scheduling a no obligation credit analysis with a HOPE4USA credit expert to learn what we can do together to help prepare you for your goal of homeownership.

michelle-black-hope4usa.com-credit-expert

Michelle Black is an author and a credit expert with over a decade of experience, the credit blogger at HOPE4USA.com, a recognized credit expert on talk shows and podcasts nationwide, and  a regularly featured speaker at seminars up and down the East Coast. She is an expert on improving credit scores, credit reporting, correcting credit errors, budgeting, and recovering from identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.

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