One thing that we have seen over the years is an increasing amount of individuals that come to us with either medical collections or student loan debt or possibly even both. Many individuals think that this could possibly ruin their chances at obtaining a home mortgage loan and luckily this isn’t always the case.
The good news about medical collections is that if you have under $2,000 of collections we don’t require these to be paid off in order to proceed forward with many loans. Normally if there are collections showing on your credit report, such as for a credit card or possibly your cable provider, then we would require these to be paid off before we could go any further.
There are also some changes coming along in regards to how long medical debts will be recorded. The new changes say that medical debts will not be reported until after a 180-day waiting period. This allows your insurance plenty of time to send the company the payment. You can find out some of the other changes happening in regards to credit reporting in this US News article.
With the rising costs of college tuition, more individuals need to take out loans in order to pay for their education. The way that we analyze your student debt is to look at your monthly payment amount that you would have to originally pay if it’s in deferment. Usually its 1% of the loan amount that you have remaining to pay off. This payment is counted in your debt-to-income ratio (DTI).
For example, if you make $2,500 a month and you took out $50,000 for college and the payment was $500, then your debt-to-income ratio (DTI) would be $500/$2500 or 20%. Underwriters like to see your total DTI, including your new house payment you’re wanting, no higher than about 41-43% depending on what loan program you’re trying to use.
One thing we see with these clients is they get out of school and instantly buy a new car and then have a high car payment. So along with the car payment and student loan payment, the DTI’s end up being too high in order for the underwriters to accept. So a little bit of advice is if you’re considering buying a home and a fancy new car, buy the house first so that car payment doesn’t get in the way.
To summarize, medical collections and student loans won’t ruin your mortgage chances every single time. If you need help in deciding if you can go through with the loan process with these certain situations contact us and we’ll try and help you out with your specific scenario!