How much house can a student borrower qualify for?

How much house can a student borrower qualify for?

This answer depends on the maturity of the student loan.

Situation:

Consider a person with a $100,000 student debt.

  • The person can either pay the debt back over a 10-year period or a 20-year period.
  • The student loan is this person’s only consumer debt.
  •  The person earns $80,000 per year.
  • The student loan interest rate is 7.0 percent.
  • The mortgage interest rate is 4.0 percent.
  • The mortgage term is 30 years.

Questions:

  • How much mortgage can the person qualify for if the person keeps the student loan at 10 years?
  • How much mortgage can the person qualify for if the person changes the student loan term to 20 years?
  • What is the increased cost of the student loan payments involved by switching from a 10-year to 20-year student loan?

Answer:   I developed a spreadsheet that calculates the maximum allowable mortgage this person can qualify for.

In order to qualify for a mortgage two conditions must hold.

  • Monthly mortgage payments must be less than 28% of income.
  • Monthly mortgage and consumer loan payments must be less than 38% of income.

The procedure used to calculate the allowable mortgage is as follows:

  • First, I calculate the maximum allowable mortgage payment based on zero consumer debt.   This value is 28 percent of monthly income.
  • Second, I calculate the maximum allowable mortgage payment consistent with mortgage payments and consumer debt payments equal to 38 percent of income.   This is done by backing out the student loan and allocating the rest to mortgage debt.
  • Third, I insert mortgage interest rate, term and payment info into the PV functions to get the mortgage amount
  • Fourth, The allowable mortgage is the minimum of the mortgage totals consistent with the two constraints.

The calculations for the two situations presented in this problem are presented in the table below

Mortgage Qualification Example for Borrower with Student Debt
row # Student Loan Information Note
1 Student loan Amount $100,000 $100,000 Assumption
2 Interest Rate 0.07 0.07 Assumption
3 Number of Payments 120 240 Assumption
4 Student Loan Payment $1,161 $775 From  PMT Function
Mortgage Information
5 Rate 0.035 0.035
6 Term 360 360
Income Assumption
7 Income $80,000 $80,000 Assumption
8 Constraint One:  Maximum monthly mortgage payment consistent with this income assumption $1,867 $1,867 28% of monthly income
9 Constraint Two:  Maximum monthly consumer and mortgage payments consistent with income $2,533 $2,533 38% of monthly income
10 Maximum mortgage consistent with constraint one. $415,697 $415,697 pv of mortgage rate number of periods, and pmt where mortgage rate and payments are assumptions baed on the market and product chosen and payment is max allowable given   income
11 Allowable mortgage payment consistent with constraint two given required student debt $1,372 $1,758 Row 9 minus Row 7
12 Max mortgage consistent with borrowing contraint two. $305,593 $391,505 Use PV function with rate and term set by market and product and payment the amount of mortgage payment after required consumer payments
13 Allowable mortgage debt $305,593 $391,505 Minimum of Row 10 and Row 12

 

An increase in the term of the student loan from 10 to 20 years increases the size of a mortgage a household can qualify for from $305,000 to $391,000.

Getting the extra mortgage is not cheap.  The increased student loan term causes total student loan payments to go from $139.000 to $186,000.

Concluding thoughts:  Most people who have $100,000 in student debt will have to refinance the student loan if they are going to buy a house.

 

 

 

 

 

 

 

 

 

 

Student debt and qualifying for a mortgage

Student debt and qualifying for a mortgage  — post one

Excel Topics:  PMT function and Spreadsheet design

Question:  A person graduates from college and graduate school with $100,000 in student debt.   The interest rate on a 10-year student loan is 5% per year.   The person wants to buy a house that costs $300,000 with a 90% LTV loan. The home mortgage interest rate is 4.5% on a 30 year FRM.

Assume that in order to qualify for the house the person must meet two conditions.

Constraint One:  The ratio of mortgage interest to income must be less than 0.28.

Constraint Two: The ratio of total interest (mortgage and non-mortgage) interest must be less than 0.38.

How much income does this person need to qualify for a loan on this house?

Why might student debt have a smaller impact on the purchase of a $700,000 home than the purchase of a $300,000 home.

Analysis:   The analysis for the $300,000 home is laid out in the table below.

Mortgage Qualification Example for Borrower with Student Debt
Note
Student loan Amount $100,000 $0 Assumption
Interest Rate 0.05 0.05 Assumption
Number of Payments 120 120 Assumption
Student Loan Payment $1,061 $0 From  PMT Function
House Amount $300,000 $300,000 Assumption
LTV 0.9 0.9 Assumption
Loan Amount $270,000 $270,000 LTV * House Amount
Intrerest Rate 0.045 0.045 Assumption
Number of Payments 360 360 Assumption
Mortgage Payment $1,368 $1,368 From PMT Function
Total Loan Payments $2,429 $1,368 Sum Payments
Monthly Income Constraint One $4,886 $4,886 Student Loan Payment divided by 0.28
Monthly Income Constraint Two $6,391 $3,600 Mortgate Payment Divided by 0.38
Required Monthly Income $6,391 $4,886 Max of income over both constraints
Required Annual Income $76,696 $58,631 12* Max Income

Observations Pertaining to the $300,000 home for a person with and without student loans

A person with no student debt could qualify for this mortgage with an annual income of $58,630.

The person with the student debt needs an annual income of $71,585.

The impact of student debt on purchases of a larger home:   The allowable mortgage is determined by two constraints one involving mortgage debt only and the other involving the sum of mortgage and consumer debt.   When the mortgage debt is very large, constraint one (the mortgage debt constraint) will be the binding constraint.

Download the student debt and mortgage qualification spreadsheet by clicking below:
Continue reading “Student debt and qualifying for a mortgage”

Increases in Undergraduate Debt 2003/2004 to 2011/2012

The statistics presented in this post document the dramatic increase in student debt between 2004 and 2012.

Increases in Undergraduate Debt 2003/2004 to 2011/2012

 

My holiday visit with in-laws included less discussion of politics this year for obvious reasons but I did have a brief discussion on student debt with one relative.   His view of the issue is that since his generation paid for their college no additional cost subsidies are needed. My concern is that the recent increases in costs are having substantial adverse impacts on the current cohort of students.

 

I am planning several more posts on college costs and their economic and impacts.   This post looks at the trend growth of student debt between the 2003/2004 and the 2011/2012 academic years.

 

The Data: The source of data for this study is the NSPAS database. I was able to access the data from the NCES Power Statistics Portal.

 

https://nces.ed.gov/datalab/index.aspx

 

My variable of interest in this post is cumulative amount borrowed in the undergraduate years by people receiving a bachelor’s degree at four-year institutions.   I have presented separate tables for private and public four-year institutions.
Three statistics are presented – Average debt for borrowers, the percent of students who borrowed, and the percent of students who borrowed more than $25,000.

 

The data does not include information on borrowing by parents through the PLUS program.

 

Statistical Results:

 

The statistics describing change in cumulative student debt are presented in the table below.

 

Cumulative Under Graduate Student Debt at Four-Year Institutions

2004 to 2012

Bachelors Degree Four-Year Public
2003/2004 2011/2012 Diff. % Diff.
Average Debt for Borrowers $11,958 $18,845 $6,887 57.6%
% of Students who Borrowed 56.6 63.5 6.9 12.1%
% of Students with debt greater than $25,000 5.3 16.9 11.6 218.7%
Bachelors Degree Four-Year Private
2003/2004 2011/2012 Difference % Diff
Average Debt for Borrowers 14,536 22,962 $8,426 58.0%
% of Students who Borrowed 66.9 69.1 2.2 3.3%
% of Students with debt greater than $25,000 9.6 22.9 13.3 138.0%
Both Public and Private Four-Year Programs
Average Debt for Borrowers 12,876 20,163 $7,287 56.6%
% of Students who Borrowed 60.8 65.2 4.4 7.2%
% of Students with debt greater than $25,000 6.8 18.7 11.9 176.4%

 

 

Summary of Statistical Results:

 

The growth of cumulative student debt among people receiving a bachelor’s degree from a four-year institution was tremendous during this brief eight-year period.

 

 

Total debt incurred by student borrowers receiving a bachelor’s degree rose by around 57% over this eight year period.

 

The proportion of undergraduate bachelor degree students incurring debt rose by 6.9 percentage points at public institutions and 2.2 percentage points at private institutions.

 

The proportion of undergraduate bachelor degree students incurring more than $25,000 in debt went from 5.3% to 16.9 percent for students at public schools and from 9.6 percent to 22.9 percent for students at private institutions.

 

Other Student Debt Trends

 

These issues will be addressed in future posts.

 

The expansion of PLUS loans to parents:

 

Increases in the use of private debt:

 

Changes in debt incurred by graduate students:

 

Changes in the number of students with excessive levels of student debt:

 

 

Economic Financial and Social Implications:

 

 

Economic issues related to the increase in student debt include – (1) A decision by many young people to live with parents and delays in starting a family, (2) a decision to delay home purchases, (3) the choice between a 30-year and 15-year mortgage, and (4) a decision to delay placing funds in a 401(k) plan.

 

Many older financial experts do not agree with the decision by many in the current generation to delay home purchases and delay saving for retirement.

 

My view is that the older generation is not in fully touch with the economic realities facing many in the millennial generation from the explosion in student debt occurring over a mere eight years.

 

I am planning a lot more empirical work on this issue.

 

PREVIOUS WORK:

 

Some of my previous work examines proposal to provide financial relief to some debtors who get over their head in debt. Here are some examples:

 

 

Seven Ways to Provide Debt Relief:

http://betterworldpolicies.blogspot.com/2016/09/seven-ways-to-provide-student-debt.html

 

Is IBR the best way to provide student loan debt relief:

http://betterworldpolicies.blogspot.com/2016/09/is-ibr-best-way-to-provide-student-loan_8.html

 

 

In addition, I have a short book on Kindle on managing debt and the impact of debt on lifetime savings.

 

The Nine Essays on Debt and Your Retirement:

http://amzn.to/2iYe1iV