Student Consolidation: Student loans impact FICO

Student Consolidation

Friday, May 16, 2008

Student loans impact FICO

I'm in my early twenties and I'm thinking about buying a house. I don't have any credit-card debt, but I owe about $20,000 in student loans. Will that hurt my chances of getting a mortgage?

Not necessarily. When you apply for a mortgage, lenders don't just look at how much you owe; your income is also a factor.

Mortgage lenders traditionally follow what's known as the 28/36 rule: No more than 28 percent of your monthly gross income should be dedicated to your mortgage payment, property taxes and insurance. And your total debt payments should equal no more than 36 percent of your gross income.

Two other factors are also important: The more money you put down, the less risk the lender takes on and the more likely you are to get a mortgage. Especially in today's market, in which lenders are looking for squeaky-clean borrowers, a bigger down payment makes you more attractive.

And, of course, lenders look at your credit score. Here, too, your student loans could have an effect -- but not necessarily negative. When credit scores are calculated, student-loan debt is viewed more favorably than credit-card debt.

That's because the FICO score, which most lenders use, divides debt into two categories: installment loans and revolving loans. Student loans, mortgages and car loans -- which require you to pay a fixed amount every month -- are installment loans. Credit cards -- which let you control your monthly payments -- are revolving loans.

Owing a lot of money in installment debt isn't going to hurt your credit score as much as maxing out your credit cards.

But young adults often get themselves into trouble by blowing off their student loans. In 2006, the default rate on federally sponsored Stafford loans was more than 12 percent. That's huge, when you consider that even in the current mortgage "crisis" only 5.1 percent of mortgage payments were late in the second quarter of this year.

Because new grads typically build their credit history based on a credit card and student loans, it's important to make your payments on time. If you're struggling to pay off your federal Stafford loans, you have several options:

• If you can't find a full-time job or you experience some other kind of economic hardship, buy time by asking your lender about deferring your loan repayment.

• If you're working for peanuts, you can lower your payments by stretching out the loan term or basing your payments on your income.

A new law just passed by Congress would phase in repayment terms that are even more generous for borrowers who need help.

Janet Bodnar is deputy editor of Kiplinger's Personal Finance magazine and the author of "Raising Money Smart Kids" (Kaplan, $17.95) and "Money Smart Women" (Kaplan, $15.95). Send your questions and comments to moneypower@kiplinger.com.

Copyright C 2007 Deseret News Publishing Co.
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posted by Irmansyah @ 4:13 PM

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