student loans & Car loans

 Student Loans & Car Loans

Student and car loans are the two major monthly payments which have the most impact on how much a potential homebuyer is qualified for. Let’s take a deeper look at the impact of student loans and car loans on homebuyers. 

The costs of college and universities have risen astronomically in the last few years. Today, Teagan graduated from nursing school, and she is excited to start her new job at the hospital she did her internship at. Teagan opted to live at home with mom & dad for the first year instead of renting. Of course, she offers to pay for utilities and groceries for Mom & Dad. Mom even makes her breakfast some mornings. Teagan’s salary is $6,250.00 per month. Mom offered to lend Teagan her car, but it’s been around before she dropped her at high school. Need I say more. So, Teagan bought and financed a car with a monthly payment of $400.00 per month. Teagan has two credit cards with a minimum payment of $25.00. Wow, did I mention Teagan’s $120,000.00 student loan that is currently deferred with no required monthly payment. 

Fast forward to one year later, Teagan decides she wants to purchase an apartment close to work for $180,000.00. Let’s do the numbers together. The apartment does not fit FHA loan guidelines. Now you are left with two options, a conventional loan with two options, one backed by Fannie Mae and the other by Freddie Mac. Her car loans and credit card payments are $425.00 per month. 

(Disclaimer: Purchase price $180,000.00, Loan Amount $171,000.00, Property taxes $250/ Month, Insurance $125.00 / Month, Maintenance fee $450.00 / Month, PMI $51.30, Interest Rate 6.25%, APR 6.85%, Monthly payment $1929.18, Credit Score 720)

For Teagan’s student loan, Fannie Mae will use one percent of the balance as your monthly payment that amounts to $1,200.00. Freddie Mac will use 0.5 percent of the balance as your monthly payment that amounts to $600.00.  

Let’s really do the math. 

Scenario One (Fannie Mae)

Income x 50 percent (50% represent Debt to Income ratio) minus monthly expenses. 

$6,250.00 x 50 percent – $1,625.00 (Student loan, Car loan and credit card payment) 

$3,125.00 – $1,625.00 = $1,500.00

Scenario Two (Freddie Mac) 

$6,250.00 x 50 percent – $875 (Student loan, Car loan and credit card payment) 

$3,125.00 – $1025.00 = $2,100.00

Scenario Three (No Student Loan) 

Now what if Teagan had no student loans, the math is simple. 

$6,250.00 x 50 percent – $425.00 (Car loan and credit card payment) 

$3,125.00 – $425.00 = $2,700.00.00

Is Teagan in a great position to purchase her home? It depends on the city Teagan is trying to purchase her apartment in. Based on the purchase price of $180,000.00 and reasonable maintenance fees, taxes and insurance and mortgage insurance, then the monthly will not exceed $2,100.00. Therefore, it is possible Teagan will qualify for a mortgage loan to purchase her apartment using scenario two. 

Now imagine Teagan purchased a car with a $650.00 per month payment and had six credit cards with a minimum payment of $325.00 per month. Now that you have the simple formula you can do the math. 

What could Teagan do differently? 

It’s possible there were available scholarships and grants while Teagan was attending school which would have reduced the balance of her student. Should Teagan have taken her mom’s offer and used her car, even spending a little to improve car performance? That ship has long sailed, now let’s look at the more realistic options.

Teagan can look within the hospital she is working with, for potential job advancement and higher income. She could also look at other job opportunities with higher income outside her current workplace. 

Student loans can possibly be consolidated and placed on an income-based payment plan. Lenders will use the actual monthly payment when student loans are under an income-based payment plan. For example, if the income-based payment is $225.00, the lender will use this amount instead of $600.00 used in scenario two. 

Let’s not give Teagan a hard time, a car payment of $400.00 and credit card payment $25.00 and choosing to live with her parents is very conservative. 

In conclusion, having a better understanding of the impact of student loans, car loans and any other loans will enable you to make a more informed decision whether you are buying a home or just want to improve your financial position. 

Finally, it’s difficult if not impossible to cover every likely loan scenario in one article, seek advice from licensed professional if you have specific questions. 

Leighton Grant 

Innovative Mortgage

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