Ask the Experts

Mortgaging Your Future

I know I will have a lot of student debt after college, but is it possible to get a mortgage as well?

It is common knowledge that college will put you into debt. You may be reluctant to get even further into debt after you graduate, however, you may want to buy a home. Fortunately, the federal government can help with a number of programs designed to assist students and those getting onto the property ladder for the first time.

In recent months, moves have been made to facilitate refinancing of mortgages to pay off student loans. Some of the largest mortgage backers in the country have introduced new policies and guidelines which enable swapping student loan debt for mortgage debt. According to loan consultants at Credit Cube, this could enable substantial savings as student debts carry a higher interest rate than mortgages.

The national student debt is a staggering $1.4 trillion, held by around 45 million Americans. This has a huge effect on the whole economy, since it prevents younger people borrowing to buy their first property. People are living at home longer and debts are getting deeper. The burden of student debts is finally being acknowledged by financial institutions, because the impact on society is far-reaching.

Reports indicate that homeownership is positively linked to college attendance and attainment. However, high student loan delinquency could damage credit scores of millions of young people and prevent them from buying their first homes. Moving from another state often makes little difference, and the debts will follow you.

Fortunately, there is some light at the end of the tunnel for around 8.5 million homeowners who still have student debt. The costs of refinancing and a ‘cash out’ have been reduced provided that funds taken out of the equity are used solely to pay off student debts. Students who have loans based on federal reduced payment plans will find that their debt to income (DTI) calculations have been adjusted in their favor. Monthly payments reported to credit bureaus now count towards your DTI ratio.

If your parents are paying non-mortgage debts, such as your student loans, they will not be included in the ratio provided that they have been paid on a regular basis for at least 12 months. This improves the debt ratio for young home buyers and it should be a little easier to secure a home loan with more favorable DTI calculations.

Under normal circumstances, mortgage lenders would have struggled to approve loans when there is still between $50k and $100k outstanding in student debt. The outlook appears a little brighter on paper when student debts and mortgage debts are combined.

Student loan deferment is not always the answer either,  as lenders would not want to see 12 easy mortgage payments coming in before the heavy student loan repayments start up. Missing any repayment could quickly affect your FICO score, so always try to make some kind of payment to each one.

Remember, a mortgage is not the easy way out of student debt. Your mortgage approval follows an appraisal of your home. As a homeowner, you are now responsible for the condition of the property, including the exterior, plumbing and electrical systems, infrastructure, etc. New homeowners must pay attention to these details to maximize their appraised home value. The appraiser is not interested in your decor, explains Locksmith Surroundings, but will be checking the window and door locking mechanisms. Homeowners have to repair problems to get the highest appraised value.

Things are still tough, and finances will be a struggle for the first few years out of college. However, changes in the way debt is treated by financial institutions are moving things in the right direction.

If you’re going to live in the house make it your goal to just pay off your mortgage… Suze Orman.

Miriam Metzinger is a regular contributor and editor for the financial website, Seeking Alpha.