Student loans have become prolific over the last decade. According to the Federal Reserve, students in the United States currently owe over $1.5 trillion in private and federal loan programs.
Since 2004, student loan indebtedness has soared 302%; roughly ten times the growth in the United States GDP during the same period. This means that student loan indebtedness has expanded ten times faster than our economy – something has to give.
$1.5 trillion is such a large number that it’s hard to fathom. But, consider this: the total outstanding debt in the United States for auto loans is $1.1 trillion and $977 billion for credit cards.
Exacerbating the burden is the fact that borrowers cannot default on their federal student loan debts like they can on a mortgage, credit card, or car loan. Student loan debt is likely to saddle indebted borrowers for decades and can become a major hurdle when qualifying for a home loan.
Much of the rapid expansion in student loan indebtedness has come since the 2008 to 2010 mortgage meltdown, while mortgage credit and underwriting standards are near their most conservative on record. This combination of highly-leveraged borrowers and constricted mortgage availability has created a significant challenge for many families who are looking to qualify for a home loan.
So, what can be done? Are there any solutions available for the highly educated and indebted?
Relying on deferment, forbearance, or income-driven repayment programs to cope with the indebtedness and to keep from getting behind on their payments helps borrowers stay current with minimum payments, but these are an additional hindrance when trying to qualifying for a home loan. Most conventional and government loans, like FHA (Federal Housing Administration), VA (Veterans Affairs), and USDA (United States Department of Agriculture), will not recognize any form of deferment or forbearance in student loans.
Mortgage credit guidelines require underwriters to qualify the would-be home buyer at a fully amortizing student loan payment. If this is not available, they will default to a percentage of the outstanding student loan balance to estimate a monthly payment. In many cases, the fully amortizing payment amount is more than the borrower can handle and blows the qualifying debt-to-income ratio beyond underwriting limits. This makes it impossible for many borrowers to qualify for traditional mortgage financing.
For example, if a client has an income of $7,000 per month their total outgoing expenses including the new mortgage, student loans, and all other indebtedness that shows on credit cannot exceed 43% or $3,000 (generally speaking – there are some exceptions). If a borrower has $50,000 in student debt that is deferred, in forbearance, or in income-driven repayment with no payment, the underwriter still has to calculate a payment. That payment will typically be in the 1-1.5% per month range. This adds another $500 to $750 per month to the qualifying debt-to-income ratio.
In many instances, adding the fully amortizing payment or percentage of outstanding balance payment to the overall debt-to-income ratio will disqualify the borrower from qualifying for a mortgage loan.
If you have found yourself caught in this situation, there is hope; a new breed of home loan programs for professionals appears to be emerging. For years, physicians and dentists have had access to “physician home loans” or “doctor mortgages” which allow qualifying Doctors of Medicine (MDs) to exclude their student loan debts or qualify based on their income-driven repayments. Some in the mortgage industry decided that, because the default rates were so low when lending to doctors, they would allow MDs to qualify without counting their student loans in their debt-to-income ratio.
Similar underwriting guidelines are now being applied to other professionals, such as:
- Registered Nurses (RN)
- Certified Registered Nurse Anesthetists (CRNA)
- Physician Assistants (PA)
- Doctors of Physical Therapy (DPT)
- Doctors of Medicine in Dentistry (DMD)
- Doctors of Dental Surgery (DDS)
- Doctors of Veterinary Medicine (DVM)
- Pharmacists
- Lawyers (JD)
- Certified Public Accountants (CPA)
- and several other professional designations
Mortgage lenders have determined that homeowners with these professional designations are excellent credit risks and have begun to loosen the underwriting guidelines specifically around student loans and self-employment history.
The expansion of these more liberal underwriting guidelines to professionals beyond MDs may be coming at just the right time, as there are more medical professionals than ever seeking Public Service Loan Forgiveness (PSLF) which, in many instances, extends both the length of time and the amount of student loan indebtedness for borrowers.
To qualify for PSLF you are required to make at least 120 payments, all of which can be reduced payments under one of the qualifying income-based repayment programs. For these professionals in public service that hope to qualify for PSLF, the game is to pay as little as possible over those 120 qualifying payments. Thus, the loan balance and repayment terms are often extended beyond what they would be if the borrower had a strategy of aggressive self-repayment.
On September 19th 2018, the U.S. Department of Education reported that a meager 96 applications had been approved for PSLF with 99% of the applications being rejected. You read that right.
Out of 33,300 applications for Public Service Loan Forgiveness, only 96 borrowers have had their debt discharged.
It would be impossible for anyone to know how this will turn out for the tens of thousands of PSLF applicants in the long term, but it’s obvious that student loan indebtedness is going to be a limiting factor for longer than many borrowers have anticipated.
Professionals that have high levels of student indebtedness or complicated non-employee (1099) income structures should rest a little easier knowing there are potential solutions for them. Qualifying is obviously not guaranteed, but there are specialized loan programs available that are beginning to craft solutions to the student loan mania that we find ourselves in currently.
Seeking these specialized loan programs may not be easy, and many local banks or credit unions may not facilitate or be knowledgeable about these programs. We have several different loan programs geared toward medical professionals, and we can help overcome the challenges that student loans and complicated income structures present.
If you have run into a challenge with another bank or loan officer I would invite you to reach out to me for further discussion on the solutions we have for you.
