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Student debt and qualifying for a mortgage

5 Oct

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:

qualification for house by student borrower

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