Money Talk: Will student debt hurt mortgage application?

Dear Liz: I recently completed a master’s degree in counseling and am now paying student loans. I am punctual and consistent in my payments. How does having a $30,000 outstanding student loan look to home lenders? We recently sold our home and are planning to purchase another.

Answer: Student loans are installment loans that typically have a positive effect on your credit scores, but your payments on these loans may affect the size of the mortgage you can get.

Many lenders these days have returned to traditional lending standards and don’t like to see total debt payments exceed a certain portion of your income (typically 36%, though some go as high as 43%). If the minimum payments on your loans and the mortgage on your desired home would push you over the lender’s limit, you may need to consider a cheaper house.

Dear Liz: Our mortgage balance is $202,000. Zillow.com says our house is valued at $162,000. The current interest rate on our adjustable-rate mortgage is 10.75% and our credit scores are in the mid-600s. We can’t refinance because of the negative equity. We have never been late and make enough to cover all the bills, but that leaves us with nothing extra. We would love to sell and rent for a couple years or refinance, but there is not one ounce of help out there for us that I can find. I did contact the bank, asking for a lower fixed rate. They said no since our mortgage payment is a tad less then 31% of our income.

Answer: A payment that’s 30% of your income isn’t ideal, but it’s not what’s causing your financial problems. Most likely overspending in other areas such as a too-expensive car loan or credit card debt is where the problem lies.

But you do face a significant risk of your payment rising to unaffordable levels when interest rates finally start marching up again.

Your first step should be contacting a HUD-approved housing counselor to discuss your options, including the new enhancements to the federal Making Home Affordable Program. You can get a referral at https://www.hud.gov. (Many housing counselors work at credit counseling agencies that can also help you work out your budget issues.)

If you can’t get a loan modification or refinance, you can consider a short sale, in which, with the lender’s approval, you sell your house for less than what’s owed and the lender accepts the proceeds as settlement of your loan. Short sales will hurt your credit, but you’ll be able to buy another home sooner than if you simply walk away or let your home go into foreclosure.

Dear Liz: I have a problem everyone would probably like. I just paid off my house early. The previous owner carried the mortgage. What is the best way to have it appear in my credit reports that I own my home free and clear, as the loan has never been reported to them? We did have a contract drawn up for the loan and I have records of all payments including the extra amounts I paid to close the loan out early.

Answer: You probably can’t do what you want to do. Even if you could, it might not do as much good as you might think.

Lenders must be subscribing members of a credit bureau in order to report information to it, and that’s an expensive proposition — well beyond the means of most individuals who carry a mortgage for a buyer.

Having a mortgage on your credit reports typically does help your credit scores, but having a paid-off loan doesn’t necessarily give you a big boost. Owning your home free and clear is good for your wallet and your psyche, but it’s not a big factor in your credit scores.

Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 12400 Ventura Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at https://www.asklizweston.com. Distributed by No More Red Inc.