A previous article described
a spreadsheet used to calculate the amount of income a student borrower might
need to qualify for a mortgage. This
post applies the spreadsheet to a practical
problem. How does the conversion of the student loan
from 10 years to 20 years impact the amount of income needed for one borrower
to qualify for a 30year FRM?
Question The
basic
situation was described in a previous post. A person graduates from college
and graduate school with $100,000 in student debt. The
interest rate on both a 10year and
20year 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 need to qualify for a $300,000 home when the student
loan is amortized over 10/20 years?
What is
the cost of the change in the maturity of the student loan to the borrower?
Background: The spreadsheet model for this blog was
presented in the previous post. Go here
for the basic model.
Analysis: To compare required income for mortgage
eligibility for student loans at 10 versus 20 years just run the model where
mortgage term is 120 months and run it again at 240 months.
Mortgage
Qualification Example for Borrower with Student Debt


Note


Student
loan Amount

$100,000

$100,000

Assumption

Interest
Rate

0.05

0.05

Assumption

Number
of Payments

120

240

Assumption

Student
Loan Payment

$1,061

$660

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

$2,028

Sum
Payments

Monthly
Income Constraint One

$4,886

$4,886

Mortgage
Payment divided by 0.28

Monthly
Income Constraint Two

$6,391

$5,337

Mortgage
+ Student Loan Payment Divided by 0.38

Required
Monthly Income

$6,391

$5,337

Max
of income over both constraints

Required
Annual Income

$76,696

$64,042

12 *
Max of Income

·
The person with a 10year student loan can
qualify for the mortgage with income of $76,696 per year. The person with a 20year student loan only
requires an annual income of $64,042 to qualify for a loan.
The extension of the maturity of the student loan from 10 to
20 years is costly.
Number
of payments

120

240

Monthly
Payment

$1,060.66

$659.96

Lifetime
Loan Payments

$127,278.62

$158,389.38

·
The conversion of a $100,000 student loan from 10
years to 20 years costs the borrower
over $31,000.
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