Student loans, consumer debt and mortgage qualification –
post three
Background: Previous
posts looked at mortgage qualification outcomes for a person with a lot of
student debt but no other consumer debt.
Creates and explains a model of mortgage qualification for
borrowers with student debt:
Estimates the sensitivity of mortgage qualification to
changes in student debt totals and student loan interest rates:
This post considers a household with more modest student
loans but additional consumer debt.
We show that for a
household with a $50,000 student loan and no consumer debt the student loan
will probably not impede mortgage qualification outcomes. However, add a modest amount of other
consumer loans and the student borrower with $50,000 in student debt will
probably be renting for a few years.
Question: Consider two households trying to qualify
for a $270,000, 4.5 percent, 30year FRM mortgage. Both households have a $50,000 student loans
with a 7 percent interest rate.
Caution: this particular post assumes a 15year student debt. This assumption is not wrong because I believe many student loan programs allow for the student to extend the term of their loan to as long as 20 years. Still I believe most students should aim at 10 years. Let me know what you think on this point and whether I should redo the post for 10 years.
One household has a $250 auto loan and a $120 minimum monthly payment on credit cards. The other household has zero additional consumer debt.
Caution: this particular post assumes a 15year student debt. This assumption is not wrong because I believe many student loan programs allow for the student to extend the term of their loan to as long as 20 years. Still I believe most students should aim at 10 years. Let me know what you think on this point and whether I should redo the post for 10 years.
One household has a $250 auto loan and a $120 minimum monthly payment on credit cards. The other household has zero additional consumer debt.
How much income do the two households need to qualify for a
mortgage?
What is the impact of the student debt on the qualification
outcome?
Answer: The situations for the two households are
outlined in the table below.
Student Debt, Consumer
Debt, and Mortgage Qualification


Student borrower with
other consumer loans

Student borrower with no
other consumer loans


Student loan Amount

$50,000

$50,000

Interest Rate

0.07

0.07

Number of Payments

180

180

Student Loan Payment

$449.41

$449.41

Car Payment

$250.00

NA

Minimum Credit Card
Payment

$120.00

NA

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

$2,187.46

$1,817.46

Monthly Income needed to
cover mortgage interest

$4,885.89

$4,885.89

Monthly Income Needed to
cover all Debt Payments

$5,756.49

$4,782.80

Amount of Monthly Income
Needed to Qualify for a Mortgage

$5,756.49

$4,885.89

Below I summarize the results in terms of annual income
needed from the mortgage debt to income constraint, the total debt to income
constraint, and the binding constraint. (Recall
the binding constraint is the one where required income is the maximum.)
Annual Income needed to
qualify two borrowers


Student borrower with
other consumer loans

Student borrower with no
other consumer loans


Annual Income from
mortgage
debt constraint

$4,885.89

$4,885.89

Annual Income from total
debt Constraint

$5,756.49

$4,782.80

Amount Income Needed 
Max of the two limits

$5,756.49

$4,885.89

Observations:
The binding constraint for the student borrower with the
extra consumer loans is the required ratio of total debt to income.
The binding constraint for the student borrower with $0
extra consumer debt is the mortgage debt to income ratio.
Extra Credit: For extra credit, the reader should
calculate the house value that would result in a binding total debt to consumer
loans constraint for the student borrower with no additional consumer
loans. Recall, student loans play a
larger role on less expensive houses because the mortgage debt constraint is
the binding one on expensive homes.
Concluding thought: Even when student loans are “only” $50,000
there could be a substantial impact on mortgage qualification when household
has modest levels of other consumer loans.
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