Monday, June 3, 2019

Student debt and qualifying for a mortgage -- post one

This post creates and uses a spreadsheet to calculate the required income a person with a $100,000 student debt needs to purchase a $300,000 house and compares that income level to a person purchasing the same house with no student loan debt. 

Background:  The process of determining whether a person is eligible for a mortgage is based on two constraints.   The first constraint is that mortgage payments should not be more than 28 percent of income.   The second constraint is that total debt payments should not be more than 38 percent of income. 

Question:   A person graduates from college and graduate school with $100,000 in student debt.    The interest rate on a 10-year 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.

How much annual income does the person with/without a student loan need to purchase this $300,000 home in this situation.  


Analysis:   The analysis  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
Interest 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
Mortgage Payment divided by 0.28
Monthly Income Constraint Two
$6,391
$3,600
Mortgage + Student Loan   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 of Income




Observations: 


  • A person with no student debt could qualify for this mortgage with an annual income of $58,630.

  • The required income for a person with the $100,000 student loan is $76, 696 around $18,000 higher. 
Other Financial Considerations:   



  • The person with student debt may choose to take out a 20 year student loan to reduce student loan payments in order to qualify for a mortgage.   The decision to take out a 20-year student loan will result in the student borrower paying substantially more in interest over the life of the loan.   
  • The person without student debt may choose to take out a 15-year FRM saving a lot of interest on the home purchase over the life of the loan.


More on these issues will follow in subsequent posts.


Authors Notes:   Interested in the economics of student loans.   Check out my book at Kindle and Amazon.

https://www.amazon.com/Innovative-Solutions-College-Debt-Problem/dp/1982999446

Do you have a question on student debt?  Feel free to email me at bernstein.book1958@gmail.com


























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