Mortgages and student loans question

[nachos31]

As far as banks, etc., are concerned, is there any difference between having federal loans vs privately refinanced loans when it comes to applying for a mortgage--does it affect the terms of the mortgage? For example, do they view a federal loans burden more favorably since they are dischargeable at death? Or would they see a better interest rate on privately refinanced loans more favorably? Does this even matter?

[Dicast]

When we applied for a mortgage the bank counted my privately refinanced loan the same as it counted my wife's yet to be refinanced federal loans.  I think they are more concerned with your overall debt to income ratio.

[DMFA]

Pretty sure they use whatever debts show up on the credit report...and student loans all show up as installment debt, I believe. Real estate debt is in a different category, as is revolving debt, e.g. credit cards. How each category specifically affects D:I I'm not fully certain.

[adventure]

Most mortgage lending institutions (banks, credit unions, etc) follow the Frannie/Freddie guidelines for mortgage lending, which require all debt to be factored into the lending calculation. If you get a "non conforming" loan (not conforming to Federal Frannie/Freddie guidelines), then the banks can tweak the loan process/calculations/terms as they see fit. "doctor loans" often fit into this category.

All debt factors into the Debt to Income ratio calculation. If debt can be deferred/postponed/forborne for 3 years, conforming loan applications are permitted omit it from the calculation, however most student loans don't count, as they are forborne/deferred on 1 year extensions. For some loans, lending institutions can also simply calculation 1% of the loan balance, and assume that is the monthly payment.

In my experience and research, banks care about the total due each month, and don't seem to mind where it is due. However, your question is likely not a huge factor during the initial application, but when your loan goes to a loan committee for a decision, such nuances may be noted by the decision makers (more often in non conforming loan situations, as conforming loans are pretty regimented).

A credit score may reflect a difference of debt per loan category (credit card, auto, mortgage, student loan) differently.

[Craigy]

It shows up as a student loan on your credit report.

They will probably like the privately refinanced loan more since you should have a lower interest rate and a correspondingly lower monthly payment which should improve your debt-to-income ratio.  Of course if you refinanced a 30 year federal loan to a 5-year private loan then you're going to negatively impact your debt-to-income ratio.

But assuming the same loan amount, term, payment, etc., this doesn't really matter.

[adventure]

To minimize our debt to income ratio before we bought our last house, we intentional waited to refianance all student loans, and kept them as federal. We put them on plan with the lowest monthly payment (25 years, graduated income).

We also paid off our credit card before the statement date. That way, the credit report shows we only owed < $100 for the past few months. The credit report doesn't show how much you use the card(s), unless you let the balance linger on/past the statement date. The bank then considered the card to add $0 debt to monthly payments, even though we spend a considerable amount on the card each month.

Post closing, you can then refinance the student loan(s), to a more palatable interest rate, lenders, # of years on repayment schedule, etc - it just allows you to maximize the amount you can borrow, to have the best chance at being approved for the mortgage you seek.

[nachos31]

Thanks for the replies.

Adventure, if what you say is true then wouldn't the refinancing of your loans post closing lead to (relatively) worse refinance options as now your debt-to-income ratio has been skewed by the mortgage? Does the decision boil down to which will be the larger amount--the mortgage vs the student loan balance?

[adventure]

You raise a valid question. This is where the type of debt made a difference for us. Refinancing student loans improves the overall financial picture, but actually gets nothing/very little (at least directly or immediately), unlike a mortgage, where I know have a place to park, sleep, work, play, and mow a lawn. We decided putting the mortgage first was a risk we'd be willing to take (to D:I), but given that we needed a place to live (not optional), and refinancing the student loans was actually optional, we prioritized the house. If you don't stretch yourself to the limit, I'd hope there is plenty of room for both. In my experience reading about (and using) DRB/SoFi/CommonBond, they put more focus on cashflow, where as mortgage lenders do so on the debt to income ratio.

[Craigy]

Another game you might be able to play is who owes on which loan.

We bought our first house when my wife was still in medschool.  She had no income so she didn't apply with me on the loan, so they didn't have to factor her student loan balance.

Now that the home loan is only in my name, I was able to refinance her student loan in her name only without including the mortgage payment.  On paper she gets her resident salary and doesn't have to pay for anything, so her DTI is 0% other than the student loan.

Funny now that her student loan is only on her credit report, when we go to buy another house my debt-to-income will be squeaky clean again.