How to Buy A Home Part 7 – Student loan debt and credit worthiness

How to Buy A Home Part 7 – Student loan debt and credit worthiness

Broker | Owner | Mortgage Consultant
Josh Lewis
Published on October 6, 2020
Student Loans and Credit Worthiness

How to Buy A Home Part 7 – Student loan debt and credit worthiness

Josh Lewis, BuyWise Mortgage and Dustin Steeve, CEO, Lighthouse Escrow discuss how to become a homebuyer on this third part of seven about the basics of what you need to understand to become a homeowner.

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In this video segment, Josh discusses student loan debt and credit

Student loan debt

  • The truth about student debt and getting a home loan.
  • Income-based repayment loans – how do they affect your ability to obtain a loan?
  • Sage advice if you have student loan debt and you are trying to qualify for a mortgage.

Creditworthiness

Verify your mortgage eligibility (Jan 21st, 2022)
  • Maxed out credit cards or not enough credit?
  • Advice and resources for cleaning up your credit.

Josh provided these two professionals to help you: www.MyLoanSense.com and www.MyCreditGuy.com

– If you’re servicing student loan debt, let’s talk about that for a second. ‘Cause student loan debt seems to be the big thing for millennials. Is there something you would tell people about student loans that you feel like you always tell that nobody seems to know?

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– It’s too late. By the time they get to me, what I would like to say is just too late. I wanna tell people before you take out the student loan, think about this.

Now we were just talking to a debt to income ratio that we use in qualifying you for a mortgage. No one uses anything of that sort when you’re applying for student loans.

You could get a degree that there is zero career potential and zero earning potential. Or you could get a degree that’s gonna entitle you to a $200,000 a year job.

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They don’t ask, they’ll give you the same amount of student loan debt for either one. I have a number of clients who are recently minted attorneys meaning in the last five, 10 years. And they’ve got 175, $250,000 of student loans, but they get it.

They’re making 180, $200,000 a year and some day will make four or $500,000 a year. I’ve also seen people come through with degrees that are like they make $30,000 and they have $125,000 student loans for their master’s degree.

And I say, well, what’s the plan here? Oh no, this is what I wanted to do, I just wanted to have a master’s. So on our end, it definitely comes into play. The government’s answer to ballooning student loan debt is the basically income-based repayment plans.

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And there are 14 different names, income-based repayment, income-driven repayment, PAYE, REPAYE.

They all have different names. But in essence what they do is they say, okay, you owe x number of dollars, here’s what the payment is to pay it off in 20 or 30 years. Now show us what you make and we’ll tell you what you can afford.

I’ve seen people with $400,000 of student loans and $125 monthly payment. It’s the equivalent to a negatively amortizing option arm which for those of you who are younger is one of the toxic products that got us in trouble in the mortgage industry 15 years ago.

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They’re outlawed in the mortgage business, but we do it every day as government policy on student loans.

So if you are in one of those plans which I would say 70%, maybe even 80% of the borrowers we see with student loan debt are in some type of income-based repayment plan.

If that’s the case, it can impact which loans you qualify for. FHA is the strictest. Other than jumbo loans, FHA is the strictest. We have to use 1% of the loan balance.

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So if you owe $350,000 to have $100 payment, well, we’ve gotta use $3,500 as the payment to qualify you for. FHA or VA comes in at just under a half of a percent.

Freddie Mac will let you use a half percent. Fannie Mae will let you use the income based repayment as long as you can document it. So for the most part, a lot of first-time buyers for many reasons, FHA is the most flexible.

So VA, if you’re a veteran, doesn’t apply to you. So of the programs that anyone can qualify for, FHA is the most flexible in terms of the source of funds, credit, debt to income ratio, all of that stuff. Well, for a lot of first-time buyers, that option is off the table because they have large student loans.

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So again, by the time they get to me, there’s only so much we can do to deal with it. Scott and I have a friend that actually runs a company. Because we do so much of the educational content on student loans and qualifying for a mortgage, her entire company is to analyze your student loans, get you into the best consolidation and income-based repayment payment plan for the loan.

And if possible if you’re in a public service loan forgiveness program, to make sure you’re getting full credit for your time served to get it removed. So other than referring them to Catalina and saying hey, you should talk to her and see what can be done.

Not a lot we can do other than say that’s our constraint is what this balance and payment is. Here is how we can translate it into a mortgage.

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– But if you can consolidate the loan and theoretically lower the interest rate, right? That’s kinda baked into that thought.

– A lot of times the rates because our government-subsidized are so low that there’s not a lot of interest rate savings, it can just simplify your life.

Because if people come with 35 student loans and it can be rolled up into one and you just see one balance, and you can actually see your progress towards it, and it makes it a little bit easier on the income-based repayment.

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But yeah, you wanna consolidate, see if there are any potential interest rate savings, but a lot of times it’s just simplifying your life so that you’re not trying to track all of these students.

– And is there any advice you’d give to somebody who is in a student loan situation where it’s like, oh, okay, I got these loans and it impacts my debt to income but I wanna be able to qualify for a home. What do you tell them? Pay it off.

– There’s really no other option. It’s not going away. Where I feel for people who have gone is that the cost of the degree. So what you have to finance to get that degree is such higher multiples of what you will earn that it’s just crazy.

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It’s just crazy. Even going back to the 90s, you could go and get out of college with 20, $25,000 of student loans and have a degree that’s gonna make you $50,000 and over a five or six-year period, before you get married and have a family, you could work that off.

Now we’ve got kids come through, they get out of college, they make $60,000, maybe 10, $15,000, more than 25 years ago. And yet their student loan debt is $100,000.

– Yeah, yeah. So that’s kinda the hard word on student loans, unfortunately, but if you’re in a situation where you may be taken out a student loan like when I took out my student loans, those loan rates were like seven, eight, 9%, I wanna say, they’re a lot lower now.

Verify your mortgage eligibility (Jan 21st, 2022)

One of the things Jane and I did when she got out of law school as we went to a bank and we consolidated her student loans and we got like a two and a half percent interest rate, right? And so that saved us some interest, it also made it a lot easier to pay down the loan.

We put it on a seven-year program. So we paid it down faster, all that kinda thing. So, look into that. And I wanna wrap this up here by talking about people who have, oh, what’s the name of Kelvin’s company, just in case anyone wants to look it up?

– I wanna say it’s Loan Sense. Let me look it here, at loansense.com I believe is what it is. And if that’s not we can get it and you can post it in the comments. It’s not loansense.com. We’ll have to get it for you. So yeah, reach out to Dustin and reach out to me and we can give you the information on it.

Verify your mortgage eligibility (Jan 21st, 2022)

– Okay, and then the final thing I wanted to talk about was credit. So if somebody has that credit, what can they do to get the kinda credit they need to get a loan?

– It depends on what’s causing the bad credit. I’ll have people come in with a low credit score and they have a perfect payment history. They’ve never missed payments but they’ve got eight credit cards and they’re all maxed.

And depending on that borrower, we have someone that will come in with $60,000 of credit card debt on four cards. So they’re 15, 15, 15, and I might have someone that comes in with $15,000 of credit card debt. But it’s again, maxed across four cards.

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If you have your cards maxed out, it’s going to have a large negative impact on your credit score. That stuff is pretty easy to fix. You pay them down to a lower percentage and it improves. If we have collections and we can get the collections deleted, that will bring up the scores fairly quickly.

Another one that we see a lot is people coming in that they just don’t have enough credit. And sometimes it sounds crazy, but opening up another credit card or two, and using them responsibly with a small amount every month can improve the scores.

We have a great credit improvement company that we work with out in Arizona. They do a free consultation sit there and we’ll go through and say, here are your issues, here’s what we are gonna need and here’s how long it will take.

Verify your mortgage eligibility (Jan 21st, 2022)

And they’ll give you a game plan and you can either attack it yourself or you can pay them to do it every month.

– And what’s the name of that company?

– My Credit Guy, that one’s easy. My credit guy.com. It’s Sam Parker out there in Arizona. They help people throughout the country. And then I was not far off and I should have known that my credit guys are a credit company and my loan sense is Catalina’s company on the student loans, my loan sense. Yap.

Verify your mortgage eligibility (Jan 21st, 2022)

– Great, so I’ll put those in the notes. That’s awesome. Is there anything else as we’re talking about the subject of buying a home especially for first-time home buyers, anything you think that we haven’t covered, that we should have covered and you wanna touch on briefly here?

– No, I think we did a good basic dive into what first time buyers should know. I would just circle back and always say everyone should be a homeowner at some point in their lives. And the sooner you arrive at that point the greater wealth you’ll accumulate over your life.

So if you’re a free spirit and you wanna wander the world through your twenties and early thirties, there’s nothing wrong with that.

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You’ll accumulate experiences, but if that’s not you and you have been on a job for several years, you have some stability, you have some savings, you have a spouse, it makes a large impact in your overall wealth and wellbeing over a lifetime.

– Awesome. Josh, thank you so much for talking with me today, giving me your time. And what’s the best way for people to find you, you produce a ton of content. So where can people find it or more about you guys at buywise, all that.

– So we are on YouTube at buywise mortgage. You can always reach me directly. My email is just Josh@bywisemortgage.com. Email’s often the best with the rates as low as they have been, we’re on the phone constantly.

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So the content is primarily YouTube driven just because the video content is easier for us to get everything out.

So, yeah. Check out the YouTube channel, subscribe there, follow us on Facebook. The website that Scott created that we’ve built over the years is findmywayhome.com and we also have a Facebook presence with that. So any and all of those.

– Awesome. All right, Josh, have a great day, good talking with you buddy.

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– Thank you, sir, will talk to you soon.

– Okay, bye bye.

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Broker | Owner | Mortgage Consultant
Josh Lewis Broker | Owner | Mortgage Consultant
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