topic Re: Second Home with Student Loan Debt in Mortgage Loans

Second Home with Student Loan Debt

Donna1966 — Sat, 14 Aug 2021 15:11:48 GMT

Hi there!

After years of putting myself through school and working on my credit I'm finally up to a 754 score. However, I was a single mom for years with a not so great paying job. Now my kids have left the nest and I make $88,000 per year.

I now want to move but am thinking of saving enough to put 20% down on another home and renting this one out. I have no issues with my DTI ratio because right now it is only 13%. Even including a new mortgage, the current mortgage and my student loans the highest it would be for the houses I'm looking at would be about 25% on the backend, and that is without including rental income.

So my question is in regards to how much I could be approved for to do the above and how the debt of the student loan figures in. I know how it affects my DTI but would it make the amount I would get qualified less? Meaning if I would normally qualify for a $300,000 second home without that debt would it still be the same? I just finished school and my student loans are currently at $82,000, which is about equal to the equity I have in my current home. TIA!!

Re: Second Home with Student Loan Debt

VALoanMaster — Mon, 16 Aug 2021 19:06:26 GMT

Hi @Donna1966,

Let's start with your student loans.

The monthly payment we use is dependent on the status of the loan.

For example.

If your loans are on an IBR plan at $0.00 per month, we can use that payment for qualifying. If they are deferred or in forbearance, we can use .5% of the balance for the payment which would put you at $410 per month.

How much you qualify for depends on things like property taxes and insurance.

Here is a quick and easy way to get a ball park idea.

The max DTI on a conventional loan is 50% which is $3,666 in your case.

Now subtract your current mortgage and $410 for your student loans (worse case scenario) and that will be your max new mortgage payment.

For example. If your current mortgage payment is $1,500 you would have $1,756 for a new mortgage payment.

Depending on taxes and insurance, that would be enough for you to buy a $300,000 home with just 5% down.

Adding the rental income would increase the amount you qualify for.

Does that make sense?

Re: Second Home with Student Loan Debt

Donna1966 — Tue, 17 Aug 2021 22:59:21 GMT

Hi there, yes, it makes perfect sense!

But if I put 5% down wouldn't I have to pay mortgage insurance? Or no because of the equity in my current home?

I have about $100,000 equity in my current home and my payment is only $700 per month. And would the rental income count at any point in the first year? I thought it wouldn't count until after a year?

I appreciate your help!!

Re: Second Home with Student Loan Debt

VALoanMaster — Wed, 18 Aug 2021 16:44:29 GMT

@Donna1966 wrote:
Hi there, yes, it makes perfect sense!

But if I put 5% down wouldn't I have to pay mortgage insurance? Or no because of the equity in my current home?
I have about $100,000 equity in my current home and my payment is only $700 per month. And would the rental income count at any point in the first year? I thought it wouldn't count until after a year?

I appreciate your help!!

Hi @Donna1966,

Yes, you would have to pay mortgage insurance if you put less than 20% down but it will be pretty low given your credit scores.

The great thing about it is you could probably have the MI dropped after a couple of years based on a new appraisal with the way homes are appreciating right now.

No, the equity in your current home doesn't really come into play other than as an asset on your loan application.

Yes, we can use rental income right away.

Re: Second Home with Student Loan Debt

Donna1966 — Wed, 18 Aug 2021 20:42:33 GMT

Oh that's great! That puts me much closer to moving!!

I will be ready to move in the Spring then, instead of next Fall/Winter, I thought for sure I'd have to have 20% down! I also want to make sure the renter issues related to COVID are over.

I will PM you to stay in touch and hopefully be able to work with you at the beginning of next year! Thanks so much!