20year student loans and mortgage qualification
Should borrowers convert from a 10year to a 20year student
loan in order to qualify for a mortgage?
In several previous posts we considered the amount of income
a household would need to qualify for a mortgage on a $300,000 home. We previously assumed that the term of the
student loan was ten years. Student
borrowers have the option of converting a 10year loan to a 20year loan.
In this post I consider the impact of the studentloan term
decision on the amount a person can borrow and the lifetime financial cost of
student loan repayments.
Question: Consider the person with a $50,000 student
loan at 7%. The person has a $120
credit card debt and a $250 auto loan.
The person wants to buy a $300,000 home with a 90% LTV loan.
How much income does this person need to qualify for the
mortgage if the person keeps the student loan at a 10year term?
How much income does this person need to qualify for the
mortgage if the person converts the student loan to a 20year term?
What are total interest payments, total student loan
payments made and the future value of all student loan payments for the 10year
student loan and the 20year student loan?
Answer: The mortgage qualification numbers and the
student loan cost numbers for the household under the two student loan arrangements
are presented below.
Student Debt, Consumer
Debt and Mortgage Qualification


Mortgage Applicant with
10year Student Loan

Mortgage Applicant with
20year Student Loan


Student loan Amount

$50,000

$50,000

Interest Rate

0.07

0.07

Number of Payments

120

240

Student Loan Payment

$580.54

$387.65

Car Payment

$250.00

$250.00

Minimum Credit Card
Payment

$120.00

$120.00

House Amount

$300,000

$300,000

LTV

0.9

0.9

Loan Amount

$270,000

$270,000

Interest Rate

0.045

0.045

Number of Payments

360

360

Mortgage Payment

$1,368.05

$1,368.05

Sum of Mortgage Payment
and Non Mortgage Debt Payment

$2,318.59

$2,125.70

Monthly Income needed to
cover mortgage interest

$4,885.89

$4,885.89

Monthly Income Needed to
cover all Debt Payments

$6,101.56

$5,593.95

Amount of Monthly Income
Needed to Qualify for a Mortgage

$6,101.56

$5,593.95

Annual Salary Needed to
Qualify for a Mortgage

$73,218.72

$67,127.36

Cumulative Interest Paid
over life of Student loan

($19,261.06)

($42,496.31)

Total Loan Payments

$80,894.54

$119,754.45

Future Value of all
payments on the Student loan

($100,483.07)

($201,936.94)

Observations:
Converting from a 10year student loan to a 20year student
loan reduces the income needed to qualify for the mortgage from around $73,000
to around $67,000
The student loan conversion increases interest paid over the
life of the loan by around $23,000.
The future value of the loan payments increases from $100,000
to over $200,000.
Also: If you convert a 10year student debt to a
20year student debt in order to get the mortgage you will still owe $33,000 on
your student debt after 10 years of payment.
Conclusion: The increase in the student loan term does
improve the ability of the mortgage applicant to qualify for a loan but the
cost in terms of additional debt payments seems steep.
This conversion might make more sense for the person with a
$100,000 student loan and no other consumer debt only because without
conversion such a household might have to rent for a long time. Still the cost seems steep.
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