There's Hidden Diversity in Student Loans: What it Means to Homebuyers

There's Hidden Diversity in Student Loans:
What it Means to Homebuyers

Did you know that it is now thought that there are almost 18,000 bird species to be found across the world?

A recent study released by the American Museum of Natural History revealed a new accounting ... one that almost doubled the number previously known and detailed by researchers.  This new larger number came as a surprise, as scientists have studied birds intently and been "birding" for a long time.  

The new study also revealed that long-held beliefs and methods of scientific bird species classification were antiquated or wrong.  Scientists now believe there is a "hidden" diversity in bird species.  That birds can look similar and actually breed together, but actually be from different species altogether. 

Fascinating stuff, right?  But what does it have to do with Student Loans?  And how does it affect homebuyers? 

Well, just as there are different species of birds ... there are different "species" of Student Loans.  

The 3 major classifications (or "species") of Student Loans are:

• Federal Student Loans
• Private Student Loans
• Refinance Student Loans

... but variations and rules and regulations for each classification of loans can vary greatly.  

And not only is there subtle variations in Student Loans themselves, but their repayment plans, program details, and the impact they take on Mortgage Loan Applicants can also be drastically different.  Those differences can prove challenging ... not only when trying to understand them ... but when considering their use and their short and long term ramification to payments and finances.

Why is that the case?

For starters, not all creditors report Student Loans in the same manner to the 3 major Credit Bureaus (TransUnion, Experian, and Equifax).  And not all loan programs or guarantors of mortgage loans view Student Loan debt in the same fashion.

Confusing, right?

As shared above, Student Loans fall into 3 categories, but typically it is Federal and Private Student Loans that are most utilized.  I'm focusing here on those that are Federal Student Loans, as they provide the widest menu of options available to current and future Mortgage Borrowers holding student loan debt.

But first, it's important to know:  

• Federal Student Loans are administered by the Federal Government.  
• Federal Student Loans are the most frequently used form of Student Loan.

There are 3 main types of Federal Loans (Department of Education).  Those  are:

1. Direct Subsidized - (Sometimes called Subsidized Stafford Loans)  These loans help undergraduate students exhibiting financial need.  Interest is not typically charged on the loan during certain periods, such as when the student is at school (at least 50% of the time).  
2. Direct Unsubsidized - Available to both undergraduate, graduate, and professional degree students.  There is no need to prove financial need associated with this type of loan.  Interest is charged during all periods.
3. Direct PLUS - Direct PLUS Loans have a fixed interest rate and are not subsidized.  That means that interest charges accrue during the time the student is enrolled in school. 

Direct PLUS Loans come in two different forms:

1. Grad PLUS - Graduate and professional students are allowed to borrow money to pay for their own education and all costs not covered by other financial aid/grants, up to the full cost of their attendance.
2. Parent PLUS - These loans are the financial responsibility of the parent, not the student.  They have a fixed interest rate and are not subsidized.  Parent PLUS loans allow parents to borrow money to cover costs not covered by their student's financial aid package, up to the full cost of attendance.  Financial need is not a requirement.

How and when these Student Loans are reported to a Credit Report is critical for current and future home buyers -mortgage applicants.  Most student loans are in deferment while the student is still considered a full-time student.  But once that student is no longer in school or considered "full-time", they must begin repayment of their student loan(s).  

Delay in repayment ... or forebearance ... can also come into play.  Rules for eligibility apply in these cases.  

So the bottom line is that Mortgage Lenders must be aware and know the ramifications of each type of Student Loan if repayment of the loan is in play.  They must also know how that repayment is reported to the credit bureaus. 

Why?   

The method of reporting can impact their mortgage applicant's Debt-to-Income (DTI) level.  

In some cases: 

• Creditors show NO payment schedule in effect for the Student Loan.  That translates to ZERO (0) monthly payment or obligation for the Loan.
• In most cases (not all), a Mortgage Lender's Underwriter calculates the monthly obligation at 1% of the Student Loan's outstanding balance.  

Equation Example:  

       A $50,000 loan with ZERO payment on the credit report:

.01 X $50,000  =  $500 Monthly Payment 

Are you even more confused now?  Then consider this ... 

There are other calculations available that can actually lessen a monthly payment burden.  The calculation used is dependant on:

• The Student Loan type involved 
• The Mortgage Loan Program being utilized  

For potential home buyers that possess a series of Student Loans, something else might be considered too.  A consolidation of their student loans may be an appropriate and wise pursuit prior to starting your home buying and financing process. 

If considering this action, it's important to conduct thorough upfront research ... or seek professional guidance and assistance ... to arrive at the most advantageous decision and financial action.  What is discovered and the actions taken could have short term or long term impact on the ability to finance a home.  It could also do harm to your overall financial status.

All these things can seem pretty daunting.  But it doesn't have to be.  An experienced Mortgage Lender can make all the difference between home buying success and failure ... and wise and unwise financial decisions. 

So who you choose to work with as your Mortgage Lender is vitally important.  The choice made has consequences and will have a huge impact on the outcome of your mortgage application.  

Simply, the knowledge possessed and depth of experience your Mortgage Lender has earned while working with prior Student Loan applicants should matter greatly to you.

If you hope to buy a home in the Chicagoland area ... either now or in the future and have Student Loans, be aware of these 3 key points:  

1. Not all Student Loans are the same 
2. Diversities exist between Student Loan types.  They can affect the outcome of your home buying/mortgage financing efforts.  Don't assume you know the outcome of a mortgage pre-qualification you haven't had.
3. If you have Student Loans and hope to buy a home, it's no time to work with a rookie or inexperienced Mortgage Lender  

Choose a Chicagoland lender that knows and understands all the "species" of Student Loans made both thoroughly and well, how each can affect you financially, and how they can impact your ability to successfully buy and finance a home (both in the short and long term) and make monthly mortgage payments.  

Seek the help of a Mortgage Lender as soon as you decide you wish to buy.  Don't go it alone.   Get the assistance, info, and facts you need to buy successfully, fluidly, and with the best mortgage options available to you. 

* Hoping to buy or refinance a home or investment property in New Lenox - Will County or elsewhere in the Chicagoland - IL - WI area?

Contact me today. I'll put my 40+ years of mortgage experience hard to work on your behalf.
I'm easily found at:

Gene Mundt

Mortgage Lender - NMLS #216987 - IL Lic. #0006220 - WI Licensed

American Portfolio Mortgage Corp.

NMLS #175656

Direct: 815.524.2280

Cell/Text: 708.921.6331

eFax: 815.524.2281

gmundt@goapmc.com

www.genemundt.com

Gene Mundt, Mortgage Originator, an Originator with 40+ years of mortgage experience, will offer you exemplary mortgage service and advice when seeking Conventional, FHA, VA, Jumbo, USDA, and Portfolio Loans in Chicago 

and the greater Chicagoland region, including: 

The Lincoln-Way Area, Will County, (New Lenox, Frankfort, Mokena, Manhattan, Joliet, Shorewood, Crest Hill, Plainfield, Bolingbrook, Romeoville, Naperville, etc.), DuPage County, the City of Chicago, Cook County, and elsewhere within IL. etc.), DuPage County, the City of Chicago, Cook County, and elsewhere within IL & WI. 

Your Referrals are Welcomed & Greatly Appreciated!