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Student loans and USDA Loans

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Drklon
Member

Student loans and USDA Loans

Thanks in advance for answering my questions.

 

My wife and I are trying to decide whether to rent for a year and then buy, or buy right now.  We are moving to an area within the USDA rural areas, and as far as I can tell we meet all of the requirements for a USDA Guaranteed Loan (Section 502).  I just graduated from law school and will be starting at a local firm (which unfortunately doesn't pay a ton so we still barely qualify).  We were thinking of going the FHA route and saving for 6 months or so to put 3.5 percent down, but then the USDA option came to our attention.

 

29% of our monthly gross income will be about 1,300, and we are looking at homes in the 180-200k range, so I think we'll be good when it all comes out.

 

My main questions.

 

1. My law school loans (well over 100k worth) are currently in deferment, but I can force them into repayment by consolidating them.  They are so exhorbitant that our current plan is to just use the PAYE plan (capped at 10% of an adjusted income) for 20 years and then take the forgiveness.  This ends up saving us about 150,000 in payments over the long term over the other plans.  If I went with normal repayment I'd have to pay nearly 2k a month just in student loan payments for 10 years, and I would likely end up paying more than just doing the PAYE plan.  (There is an outside chance that this will burn me in the end if I end up becoming relatively wealthy in 10 years or so, because I'll have to pay a bunch of accrued interest, but I think I'll take that chance.)

 

Anyway, long story short -- will the loan be possibly approved if the student loans are still in deferment, or do I need to force them into repayment so that I can give them a number to plug into the DTI calculation.  (I already have that number -- I just won't have to pay it for another 4 months).

 

2.  I'm starting a new job.  I've read that under the FHA rules, they'll count your income as going back 2 years if you graduate from a graduate school and get a job in that field (which I have.)  Ideally, we could line everything up in advance and then bring my first pay stub to show income to close the loan.

 

The other possible complication is this:  my wife is also a professional but only works part time.  She has worked quite a bit the last year to get us through the end of my schooling, so we have about 35k in earned income for this year.  However, she will no longer be working in about 3 weeks.  If her income is added to my future income for this year, we'd still be within 115% of AMI, but just barely.  If they treat her income as if it will continue, then we'll be way outside of the requirements.

 

Other random info:

 

We both have decent (but not great) credit scores.  Hers is 715ish and mine is around 700.  I have some revolving debt in my name, but the max monthly payments are less than $100, so it wouldn't affect our DTI unless we really pushed the limit of what we could afford.  Our newest derog is almost 3 years ago, and everything is paid.

 

We also have a few thousand in current cash reserves that are earmarked for getting into a rental that could go either to paying off that CC debt or paying all of the closing costs of the loan.

 

 

Thanks in advance for any help!  We don't want to get our hopes too far up, but if we could get into our own house instead of renting for 6 months it would be awesome!

 

Message 1 of 6
5 REPLIES 5
tammyjk
Regular Contributor

Re: Student loans and USDA Loans

You can still go USDA if your loans are in dererred status.  They will use one percent of the amount as your payment and include this in your debt to income.  Something to keep in mind if going USDA is that interest rates are on the rise.  USDA certainly takes much longer and last I knew, they were backlogged.  Last week my broker was telling me that one of his clients was waiting on funding for over a month and in that time the interest rate went up one percent.  So I would certainly check to see if funding was available.  Also keep in mind that USDA only applies to certain properties.  Your best bet would be to speak to someone who deals with USDA and FHA to see which program is best for you.

 

As to your wife working, I would check first but I believe if she were to quit before the application process you would be ok.  BUT check first.  I had a part time business which I discontinued before I looked into USDA and it wasnt counted in my income because I could prove no income from it via bank statements.  The income stopped 5 mos prior to my application.  Although my tax returns for 2 years did show the income. 

 

As I stated before, find someone who deals with both programs to see which option is best for you ...good luck.

 

 

Message 2 of 6
Genkeim
Frequent Contributor

Re: Student loans and USDA Loans

I'm going through USDA right now with my GF. She's working 2 part time jobs, one she's had for 2 years the other is 6 months. Under USDA rules part time jobs with less than a 24 month history will not count toward repayment of the mortgage. However they will count the income toward the income requirement for the USDA program. So we're only allowed to use one of my GF's jobs toward the mortgage itself but both count toward the requirements of the program. 

 

I'm not sure how long you need to not be working a job for them not to count it it all. We thought we were going to have to do that, we're $300 from the USDA limit. 

 

Also, think about getting your student loans into IBR or PAYE before starting the process. My loans are just under $50k and it's but us at DTI limit because they're still in deferment and we had what the normal payment amount would be. I've seen some others on here have conditions from the UW to move their loans into IBR. As was mentioned before talk to a lender who does USDA they can give you the best advice for your specific situation.

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Message 3 of 6
Drklon
Member

Re: Student loans and USDA Loans

Thanks for the replies!

 

Yeah, keeping my loans in deferrment will NOT work then! 1% of the total principal amount is close to 1,500, which would kill debt to income.  So I think I'll have to consolidate them to force them into repayment.

 

Beyond that: I've already checked with USDA and the entire town that we want to purchase in is eligible.  I put in a call to a lender and the LO will be available Monday morning, so I'll give her a call.

 

Correct me if I'm wrong -- but Section 502 loans - Guaranteee are funded by the lender and then guaranteed by the USDA.  So funding availability would be at the lender level, and not the USDA.  There is another USDA loan type that provides direct funding, but we make way too much for that one.  So maybe it is the underwriting process that takes longer because they need USDA approval before the loan closes?

 

Thanks again!

Message 4 of 6
jadeite788
Established Contributor

Re: Student loans and USDA Loans


@Drklon wrote:

Thanks in advance for answering my questions.

 

My wife and I are trying to decide whether to rent for a year and then buy, or buy right now.  We are moving to an area within the USDA rural areas, and as far as I can tell we meet all of the requirements for a USDA Guaranteed Loan (Section 502).  I just graduated from law school and will be starting at a local firm (which unfortunately doesn't pay a ton so we still barely qualify).  We were thinking of going the FHA route and saving for 6 months or so to put 3.5 percent down, but then the USDA option came to our attention.

 

29% of our monthly gross income will be about 1,300, and we are looking at homes in the 180-200k range, so I think we'll be good when it all comes out.

 

My main questions.

 

1. My law school loans (well over 100k worth) are currently in deferment, but I can force them into repayment by consolidating them.  They are so exhorbitant that our current plan is to just use the PAYE plan (capped at 10% of an adjusted income) for 20 years and then take the forgiveness.  This ends up saving us about 150,000 in payments over the long term over the other plans.  If I went with normal repayment I'd have to pay nearly 2k a month just in student loan payments for 10 years, and I would likely end up paying more than just doing the PAYE plan.  (There is an outside chance that this will burn me in the end if I end up becoming relatively wealthy in 10 years or so, because I'll have to pay a bunch of accrued interest, but I think I'll take that chance.)

 

Anyway, long story short -- will the loan be possibly approved if the student loans are still in deferment, or do I need to force them into repayment so that I can give them a number to plug into the DTI calculation.  (I already have that number -- I just won't have to pay it for another 4 months).

 

2.  I'm starting a new job.  I've read that under the FHA rules, they'll count your income as going back 2 years if you graduate from a graduate school and get a job in that field (which I have.)  Ideally, we could line everything up in advance and then bring my first pay stub to show income to close the loan.

 

The other possible complication is this:  my wife is also a professional but only works part time.  She has worked quite a bit the last year to get us through the end of my schooling, so we have about 35k in earned income for this year.  However, she will no longer be working in about 3 weeks.  If her income is added to my future income for this year, we'd still be within 115% of AMI, but just barely.  If they treat her income as if it will continue, then we'll be way outside of the requirements.

 

Other random info:

 

We both have decent (but not great) credit scores.  Hers is 715ish and mine is around 700.  I have some revolving debt in my name, but the max monthly payments are less than $100, so it wouldn't affect our DTI unless we really pushed the limit of what we could afford.  Our newest derog is almost 3 years ago, and everything is paid.

 

We also have a few thousand in current cash reserves that are earmarked for getting into a rental that could go either to paying off that CC debt or paying all of the closing costs of the loan.

 

 

Thanks in advance for any help!  We don't want to get our hopes too far up, but if we could get into our own house instead of renting for 6 months it would be awesome!

 


If you just graduated, u only have 6 months grace period on your student loans left until repayment.  I suggest you get on either ICR, IBR, or pay plan quick.  Lenders will only approve deferments of 12 months or greater.  otherwise it is automatically calculated into DTI.

 

The new job is okay.

 

Your wife, they going to ask for your W2 forms from last year and paycheck stubs, so they are going to count both your incomes because of her credit scores too.


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Message 5 of 6
teachag89
Established Member

Re: Student loans and USDA Loans


@Drklon wrote:

 

Correct me if I'm wrong -- but Section 502 loans - Guaranteee are funded by the lender and then guaranteed by the USDA.  So funding availability would be at the lender level, and not the USDA.  There is another USDA loan type that provides direct funding, but we make way too much for that one.  So maybe it is the underwriting process that takes longer because they need USDA approval before the loan closes?

 


That is how I understand it, also.  I've read that some states take a couple weeks to be approved through USDA once it's sent and others have gotten their approval from USDA back within a day or two.  We're also doing USDA guaranteed.  My husband was finishing up school & doesn't have two years worth of tax returns.  Our lender said that was fine, she just needed verification of enrollment for the time period he was not working.  Good luck!

Message 6 of 6
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