## Tuesday, June 4, 2019

### Student Loan Maturity and Mortgage Eligibility

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 30-year 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 10-year and 20-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 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 10-year student loan can qualify for the mortgage with income of \$76,696 per year.  The person with a 20-year 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.