Your debt-to-income ratio is an important factor in your home loan application, whether you are applying for a VA loan or another type of loan. The debt-to-income ratio looks at how much money you have coming in and compares it to how much money you have going out in payments.
Student loans are a huge chunk of debt for most people, and since student loan payments are usually fairly large, they can be a big factor in a home loan application. They also make it harder to save up for a down payment and closing costs.
Having student loans is not enough to automatically make you unable to get a home loan. However, missing payments or defaulting on your loans can harm your chances of obtaining a mortgage.
Lowering Your Debt-to-Income Ratio
Most mortgage lenders will require you to have a debt-to-income ratio below 30 percent, sometimes up to 36 percent. If your student loans are interfering with that, you can look into lowering the amount you have left to pay off, refinance or consolidate your loans to lower your monthly payments, or enroll in an income-based repayment plan. Those allow you to lower your payments to be aligned with your income level. They can lower your payments down to 10 to 15 percent of your monthly income.
One way you can keep your student loans from interfering with your VA home loan application and debt-to-income ratio is by having them deferred. While your loan is in deferment, you will likely have no payment or a significantly reduced payment. If you have federal student loans, they are automatically deferred for six months following your graduation, so if you can get them deferred for an additional six months, the loans will not impact your VA home loan.
One thing that is tricky with this method is that if they are deferred due to financial hardship, this can make them count against you instead of for you. If you deferred your loan because you cannot afford it, the lenders will assume you also cannot afford a monthly mortgage payment.
Some of the reasons you can get your loan deferred are:
According to the VA, “If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis. If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.”
Getting your loans deferred can be difficult, depending on who your student loans are through. Different financial institutions have different rules for deferment of student loans, so in order to get them deferred, you will need to contact them directly to find out what is required and what that entails.
- -You are currently enrolled in school at least half-time or are in a career school
- -Serving active duty
- -Unemployment or under-employment
- -Economic hardship
Guest blog from American Financial Resources*
It is a great honor to serve our military men and women, and VA home loans help us make home buying possible for many of these families.
If you’ve served in the military, you should be aware of some of the big changes in VA home loans that were ushered in with the new decade. Policy changes enacted as part of the Blue Water Navy Vietnam Veterans Act of 2019** became effective on January 1, 2020.
Veterans and active-duty service members may now have more borrowing power, but may also pay higher fees for new VA home loans in 2020.
In addition to extending disability benefits to more Vietnam War veterans exposed to Agent Orange, the new law eliminates VA loan limits for borrowers with full entitlement to VA loans. However, the VA funding fee has increased for most borrowers. The exception being active-duty Purple Heart recipients. Members of the Armed Forces serving on active duty who are in receipt of the Purple Heart award are now eligible for the VA funding fee waiver, even if the Purple Heart was awarded during a prior period of military service.
Irrespective of the changes, the benefits of VA home loans remain the same. They have competitive interest rates and can provide 100% financing with no down payment required, among other advantages.
No More VA Home Loan Limits
Removing the loan limits for new VA home loans is a huge win for veterans and military families for the new year. The elimination of loan limits doesn’t mean unlimited borrowing power. Borrowers will still need to have sufficient income and meet a lender’s credit requirements to qualify for the loan amount. The good news is that veterans stationed in costlier real estate markets can now stretch the zero-down buying power of their benefit.
It is important to note that loan limits will still apply to veterans who have one or more active VA loans, or have defaulted on a previous loan. Existing loans will follow the same county guidelines set by the Federal Housing Finance Agency; which in 2020 is $510,400 in a typical county and higher in more expensive housing markets.
If a homebuyer is subject to VA loan limits, the lender, like American Financial Resources, will require a down payment if the purchase price is above the loan limit.
VA Funding Fee Increases for Some
The VA funding fee is a congressionally mandated fee associated with the VA home loan. For the next two years, veterans and service members will see a slight increase of 0.15 to 0.30% in their funding fee, while National Guard and Reserve members will see a slight decrease in their fee. Veterans with service-connected disabilities, some surviving spouses, and other potential borrowers are exempt from the VA loan funding fee and will not be impacted by this change.
The VA funding fee paid will depend on the down payment amount and whether this is a first or subsequent VA home loan for the borrower. The fee for first-use, zero-down loans is 2.3% of the loan amount in 2020, up from 2.15% for active-duty military and veterans in 2019. The fee for subsequent use loans will be 3.6% of the loan amount, up from 3.3%. These fee levels will stay in place for two years, return to 2019 levels from 2022 through Sept. 30, 2029, and then drop further after that.
Again, active-duty service members who have received a Purple Heart are now exempt from the funding fee.
Benefits of VA Home Loans
While it is important for eligible borrowers to understand the recent changes, veterans and active military should also be clear on the benefits of VA loans.
VA loans are one of the only no-money-down options still available. Instead of waiting years to save up for a home, eligible borrowers can move forward with a home purchase, as well as borrow additional funds for renovations on the home, all with zero down payment.
Locked-In, Low Interest Rates
Since eligible borrowers can purchase or refinance a home, and the cost of repairs or updates, all in a single mortgage loan, a VA loan provides considerable savings when compared with other programs that might require a second mortgage.
Fewer Added Costs
Eligible borrowers using a VA loan not only enjoy limited closing costs with a single appraisal, but there’s also no mortgage insurance requirement, which could add up to savings on monthly mortgage payments. And, eligible borrowers don’t have to worry about being charged any prepayment penalties if they are able to pay off their mortgage earlier than expected.
If borrowers are experiencing periods of temporary financial difficulties and are struggling to make mortgage payments, the Department of Veterans Affairs can provide assistance to help them retain their home.
For 75 years, VA home loans have enabled thousands of deserving families to become homeowners. At AFR, we’re proud to provide these benefits to the brave men and women who have served our country and will continue to help many more generations of veterans come home.
About American Financial Resources, Inc.
American Financial Resources, Inc. (AFR) is the leading FHA 203(k) lender for sponsored originations in the country and an innovator in the construction and renovation lending area, as well as being ranked among the nation’s leading mortgage lenders. AFR utilizes the latest technology and delivers educational resources to mortgage brokers, loan originators and their customers. American Financial Resources, Inc. is an Equal Housing Lender: Lender NMLS 2826 at www.nmlsconsumeraccess.org. For more information, visit www.afrwholesale.com.
*Lender NMLS 2826. www.nmlsconsumeraccess.org. American Financial Resources, Inc. (AFR) is a wholesale and correspondent lender. This is not a commitment to lend. All loans subject to credit approval. Guidelines subject to change without prior notice. This information is provided to assist business professionals only and is not an advertisement extended to the consumer as defined by Section 226.2 Regulation Z. Equal Housing Lender. Corporate Headquarters: 9 Sylvan Way, Parsippany, NJ 07054. www.afrwholesale.com