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 10year 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 nonmortgage)
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.
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.
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.
Authors Notes: Go to the Excel Finance Function Tutorial question nine for follow up questions involving modifications of this spreadsheet.
Actual mortgage calculators, which include informations on taxes and insurance are more
complicated than the one I am presenting. Links to these calculator are presented below.
A qualification calculator for FHA loans:
A calculator from BankRate:
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