It’s becoming more and more expensive over the past several years to attend and graduate from a four-year college. Colleges have not only raised tuition but have also added and raised additional fees to address various academic programs and overall college operating expenses. Tuition bills don’t just list the hourly tuition but a multitude of additional charges that are kind of hard to pin down. Some will tell you that a tuition bill rivals a hospital bill as it relates to interpreting where all the money goes. Books for classes can run into the hundreds of dollars. And that’s just the start as room and board along with an occasional entertainment expense and you’re now talking several thousand dollars per semester. Even with scholarships and grants, it’s more than most can manage. That’s why student loan debt has exploded over recent years due to the cost of attending college and graduating.
And what happens to those who pursue a graduate degree? Doctors, dentists, lawyers and others continue their education well into their 20’s and accumulate a mountain of student loan debt. Today, the average student loan debt for undergraduates is close to $40,000 and for professional degrees such as a medical doctor $100,000 or even more. That’s why student loans are almost a necessity just to graduate. But this growing debt will last for several years and with that debt, it means first time buyers who have recently graduated can find it hard to qualify for a loan to finance a home they want because the additional student loan debt keeps their debt ratios too high. There are options, however, especially as it relates to VA loans.
Monthly Payments, Forbearance and Deferment
Students who take out student loans don’t have to pay them back while they’re in school, but will start making monthly payments at some point soon after graduation. For someone that has $50,000 in student loan debt, that can mean an average monthly payment of around $500 per month. But student loans, even though they don’t have to be paid back while in school, will need to have regular payments made after graduation, but not right away. Students may or may not have a job immediately upon graduation and because of this, most student loans have a deferment period which gives the new graduate time to find a new job, relocate if necessary and adjust to their new employment.
Forbearance is a status the graduate can apply for directly with the loan servicer and puts all monthly payments on hold for one year. At that point, the individual can apply for another year of forbearance. Forbearance is usually granted if it appears current monthly income does not leave enough residual income after all bills are paid for everyday expenses such as food, transportation and rent, for example.
When student loans are in deferment, it simply means they don’t have to be paid back right away and the deferment can last anywhere from six months to two years or even longer. But here’s the catch with deferment- even though a student loan is deferred the monthly debt ratios are still counted against their debt ratios. This monthly obligation, even though it’s not currently being paid back as indicated in the terms of the loan, is still counted when lenders review a mortgage application. But VA loans provide some relief.
The first VA home loan guidelines were issued way back in 1944 as soldiers were returning from WWII. These guidelines were part of a bigger package called the American Serviceman’s Readjustment Act of 1944 which most referred to as the G.I. Bill. The VA at that time handled the entire VA loan approval process from accepting loan applications to processing and underwriting them.
The most favorable feature of a VA home loan is probably the lack of a down payment and carries a government guarantee. As long as the lender approves a VA loan using proper VA protocol, should the loan ever go into default the lender will be compensated at 25% of the loss. This compensation is financed through what is known as the Funding Fee which is included in most every VA home loan approved today. The funding fee will vary based upon the nature of the loan and borrower but for first-time buyers using their VA eligibility the funding fee is 2.15% of the sales price and is rolled into the loan amount.
VA loans are one of three government-backed loans, the other two are the FHA and USDA programs. Both also offer a guarantee to the lender but FHA and USDA loans have two forms of mortgage insurance similar to the funding fee. There is an upfront fee rolled into the loan amount and there is an annual fee that is paid in monthly installments. This additional monthly mortgage insurance fee affects a borrower’s monthly debt payments and reduces the amount someone is qualified to borrow. VA loans, on the other hand, don’t have this additional fee. Further, VA loans carry some very competitive interest rates and along with the lack of a monthly mortgage insurance premium allow borrowers to qualify for a larger loan with the same monthly income.
VA Loans and Student Loans
Okay, we’ve reviewed student loans and VA loans, so let’s see how they can work together. We mentioned that VA loans treat student loans a bit different compared to FHA, USDA and conventional loans underwritten to Fannie Mae and Freddie Mac standards. You recall that these loans count student loan debt even if the loans are in deferment. For someone taking out a conventional conforming loan and using a Fannie loan program, student loan payments are counted even if the payments are deferred for two years.
Not so with the VA loan program. As long as the student loan payments are deferred for at least 12 months from the date the VA loan has funded are not counted in the monthly debt ratios. A credit report for someone with student loans in deferment will typically have the term associated with each student loan in deferment. What it may not show however is how long the deferment will last. If the deferred period is for six months with a VA loan, the debt must be counted when qualifying but if the student loan payments are for more than 12 months away, they are not.
Now when you consider a borrower taking out a VA loan that has student loan debt but in deferment for at least 12 months along with zero money down, competitive rates and no monthly mortgage insurance payment, for someone in this situation the VA loan is the ideal solution. Borrowers with VA eligibility who want to come to the closing table with as little of their own funds as possible will find the VA home loan is their best option. When you then consider the fact that VA loans, unlike other mortgage programs, do not count student loan payments in deferment for at least 12 months, it’s even better.
If you’re thinking that you need to pay off your student loans before you ever start thinking of buying a home but want to be a homeowner, then the VA program just may very well be the perfect fit.
“The author, Matt Herbolich, MBA, JD, LLM NMLS #1649154, is a senior loan officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS# 227262. Contact Matt Herbolich, MBA, JD, LLM for your Real Estate and Mortgage Questions. USA Mortgage is a direct lender with no lender overlays on Government and Conventional Loans. Mr. Herbolich can be reached 7 days a week at 888-900-1020 by phone, on his cell at 786-390-9499 by either phone or text, or by email email@example.com.”