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.
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 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.
How much annual income does the person with/without a student loan need to purchase this $300,000 home in this situation.
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 20year 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 15year 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/InnovativeSolutionsCollegeDebtProblem/dp/1982999446
Do you have a question on student debt? Feel free to email me at bernstein.book1958@gmail.com
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