It’s pretty common to have student loan debt these days. In fact, according to a recent article by The Motley Fool, Equifax reports that there are 40 million Americans that have at least one outstanding student loan. Of them, the average owes $29,000, up from $23,000 in 2008. But, what does that mean for those looking for a mortgage or a refinance? How does student debt impact your financial standing?
In this blog, we’ll discuss how lenders look at installment loans like student loans, how they impact your credit score, and what you should consider if you’re thinking about refinancing your mortgage and have student loan debt.
Installment Loans, Student Loans and Your Credit
Installment loans - such as mortgages, car loans, and student loans - have a fixed number of payments, and the term can be as short as a few months or as long as 30 years. Student loans are typically considered installment loans, as they are paid monthly with interest.
Generally speaking, student loan debt does not carry any special consideration and is typically treated the same as any other installment loan. Whether the student loan is federal or private also does not matter, although you can check which type of student loan you have through studentloans.gov.
The good news about student loan debt is that having it is not necessarily a bad thing, nor does it mean having it will hurt your credit score. Luckily, FICO places more weight on revolving credit versus installment debt.
Revolving credit - such as credit card debt - weighs differently on your credit score because the balance on your credit cards can impact your debt to income ratio from month to month.
Unlike revolving credit, the amount of the payments is the key factor. If you have five student loans with payment amounts ranging from $50 to $100 each, that can be anywhere between $250 a month to $500 a month. For some people, this is equivalent to a car payment or even a mortgage payment. It would make sense that this type of payment would reduce one’s borrowing power.
On the flip side, for those who have a short or limited credit history, student loans can be a great way to build credit and show your ability to manage your credit and make on-time payments.
Considering a Refinance with Student Loan Debt
If you’re considering refinancing your home and have student loan debt, your biggest priority should be your debt to income ratio and your credit score. Here are a few things to keep in mind when refinancing with student loan debt:
#1: Maybe It’s Time To Consolidate: If you have considerable student loan debt - with several different loans - it’s often a good idea to consolidate your student loans to reduce the total number of payments you have. You might have the opportunity to consolidate your student loans into your new mortgage at a lower interest rate by doing a cash out refinance. Of course, you should speak to your lender before doing this, as it’s not always necessary.
#2: Monitor Your Credit Report for Accuracy: It’s also important to make sure that your student loan debt is reporting correctly on your credit report. If, for example, you’ve recently paid off your loans and they’re showing as open balances, or if you’ve consolidated by they’re still showing up as individual loans, this can impact your score and your financing ability. You can dispute these items with the credit bureau, and you should always be prepared with documentation that shows the changes.
#3: Avoid Delinquencies: You should always avoid delinquencies; however, if you’re considering a refinance that is backed by the government - it’s very important to stay current. Ignoring payments could disqualify your application.
#4: Get Documentation of Deferment: If you’re loans are deferred, get a letter from the servicer that shows how much the payments will be when they come due and payable. This can be valuable in helping the lender determine your refinance ability.
It should be mentioned that if a student loan is deferred for 12-months or longer, only on an FHA loan can the payment be excluded from the lender’s qualifying ratios. This applies mostly to first mortgages.
#5: Consider Your Debt-to-Income Ratio: Perhaps the biggest hurdle will be your debt-to-income ratio, as this is one of the most important factors taken into consideration when refinancing. Speak with your lender to determine what their qualifying debt-to-income ratio is, and then work to reduce your debt to achieve a better ratio.
Refinancing Your Mortgage With Student Loan Debt
The most important takeaway here is that student loan debt - like most debts - is an important part of your credit history, and is definitely considered when applying for a refinance of your mortgage. Impacting your debt-to-income ratio and your overall credit score, it’s important to make on-time payments and to ensure that your student loans are being accurately reported on your credit report.
If you’re thinking about refinancing your mortgage, it’s best to speak with a lender who can advise you of any steps you need to take to improve these areas before submitting your application.
At Lenda, we’re dedicated to changing the way that the world refinances. We’ve moved the entire refinance process online and have streamlined the system for better transparency and customer experience.
When you’re ready to explore your options, or if you’d like to see how your student loan debt will - or will not - impact your ability to refinance, please connect with us today. We’re just a click away and look forward to helping you through the process. You can also start your mortgage refinance by getting a free rate quote.