Mortgages - Dealing With Student Debt

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Outstanding student loan debt now totals over $1 trillion, according to a report last month from the Consumer Financial Protection Bureau. That surpasses the amount owned on all credit cards in the United States.

Student debt has become an issue in the presidential race, with both President Obama and Mitt Romney, the presumed Republican nominee, supporting efforts to extend loan subsidies set to expire in July.

Last year alone, students took out $117 billion just in federal loans. And it’s no wonder: According to the College Board, the average annual cost of out-of-state tuition, room and board at a public institution is $29,657; at a private nonprofit, it is $38,589.

“Some student loan payments are as high as a mortgage,” said Cari Sweet-Kostoplis, an assistant vice president of the Jersey Mortgage Corporation in Parsippany. She noted that one client who had monthly loan payments totaling $2,800 opted to work as a prison psychologist to qualify for a federal student loan forgiveness program offered to those who undertake community service work after graduation.

Ms. Sweet-Kostoplis and other industry experts say that many first-time buyers get turned down for mortgages because their student loan debt significantly raises their overall debt level. Most lenders follow underwriting guidelines that limit total debt payments — for the mortgage and property taxes, plus credit cards, student loans, car loans and other debts — to 45 to 50 percent of a borrower’s adjusted gross income.

Assuming the mortgage and taxes will eat up 33 to 35 percent, that means student loan payments, plus credit card bills, can account for no more than 10 percent or so of gross income, Ms. Sweet-Kostoplis said. That equals $833 a month for someone who makes $100,000 a year.

To lower monthly loan payments, borrowers can restructure or consolidate student loans. Mark Kantrowitz, the founder of FinAid.org, which offers advice on student loans and scholarships, says some students choose to extend the length of the loans.

Loan consolidations may be done through the student loan provider Sallie Mae, and could net an interest rate as low as 3 percent and a term of up to 25 years, said David Boone, a first vice president of Provident Bank in Jersey City, N.J.

Before embarking on a home search, Mr. Boone recommends aggressively paying off student loan debt and refraining from taking on any more big debts, like buying a car. Borrowers should also make sure that their student loan payments are made in a timely manner. A loan would be declared delinquent if payments were 30 days or more late, said Heather Jarvis, a lawyer in Wilmington, N.C., who offers student debt training as well as advice for high-debt individuals.

Ms. Jarvis, who graduated from law school with $125,000 in student debt, also notes that there is no statute of limitations on collection for past-due student loan payments, and says she even knows of people who have had their Social Security checks garnished to repay them.

Conversely, she added, repaying student loans on time and in full would also help improve a borrower’s credit score.

Another way to lower student debt is to get the borrower’s family involved, though this comes with risks.

For example, Mr. Kantrowitz said, parents or grandparents could agree to take out a home equity loan and use the proceeds to pay off the student loan balances. The borrower would then repay the home equity loan, either to the parent or directly to the lender. Home equity loans usually have lower interest rates than student loans because the debt is secured, he said, adding that if the rate was at least two percentage points below the student loan rate, it could be worthwhile making the switch.

This article has been revised to reflect the following correction:

Correction: May 6, 2012

The Mortgages column last Sunday, about qualifying for a mortgage while still paying back student debt, misstated the policy of Sallie Mae, a student loan provider, on consolidation loans. It offers private loans to current college students who need to supplement federal financial aid, but it does not offer consolidation loans.

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More Homeowners Seek Reverse Mortgages at Earlier Age

Reverse mortgages have always been viewed as a last resort — something that older retirees could turn to when they desperately needed to supplement their dwindling incomes. But in the wake of the housing market’s collapse and high unemployment, a new study has found that people are using reverse mortgages to alleviate more urgent financial pressures, like paying off debt. And homeowners are applying for these loans at much younger ages than they have in the past.

Reverse mortgages allow people age 62 and older to tap what may be their biggest asset, the equity in their home, without having to make any payments. Instead, the bank pays the borrowers, though they continue to be responsible for paying property taxes and homeowner’s insurance. When borrowers are ready to sell (or when they die), the bank takes its share of the proceeds from the sale, and borrowers (or their heirs) receive whatever is left.

The study, conducted by the MetLife Mature Market Institute and the National Council on Aging, analyzed data collected from reverse mortgage applicants who went through mandatory counseling sessions with government-approved counselors. The study covers 21,240 sessions from September through November 2010.

“Consumer attitudes about reverse mortgages are changing because the recession has eroded confidence about retirement security, and Americans will rely more and more on these measures,” said Sandra Timmermann, director of the MetLife Mature Market Institute. “As reverse mortgages do not have income requirements and since other forms of credit have become less accessible, these loans will become more attractive.”

The research found that about 21 percent of homeowners who went through counseling were 62 to 64 years old — even though you can pull less money out the younger you are. That’s a sharp rise from the 6 percent of borrowers in that age group who applied for reverse mortgages in 1999.  Those findings are also consistent with a recent industry analysis that found a dramatic shift toward younger borrowers in the past few years.

MetLife Mature Market Institute

And while the average age of the borrower is 73 years old, as the chart above shows, the average age of homeowners who went through the counseling was 71.5 years old. That is consistent, the study said, with the housing department’s findings. “As we look more closely at the age distribution of recent counseling clients, it appears that this broad trend may conceal the start of a major generational shift in the use of reverse mortgage loans,” the study said.

Of homeowners who are considering a reverse mortgage, nearly 46 percent are under the age of 70, according to the study.

The vast majority of counseling clients in 2010, or 67 percent, were seeking the reverse mortgage to lower their household debt. Only 27 percent were considering it to improve their quality of life. Most recent counseling clients (67 percent) said they had a conventional mortgage that needed to be repaid if they decided to take out the mortgage, whereas 27 percent reported having both housing and nonhousing debt. Naturally, using their equity to repay the debt means they will have less left should they need to access it in the future.

For nearly one-third of counseling clients, the existing mortgage may exceed half the value of their home, the study said. That means they may not have enough equity to qualify for the mortgage, or they have to wait several years until they can qualify for a loan that’s large enough to satisfy their financial needs.

Most reverse mortgages originate through the Department of Housing’s Home Equity Conversion Mortgages program — known as HECM (pronounced HECK-um) — which has become more popular over the past 10 years. There have also been many changes to the program, including a new loan option known as the “HECM Saver,” which requires lower upfront fees. That version came out in October of 2010, so the study noted that its results may reflect the fact that more homeowners considered those loans, though it’s unlikely that it had a major effect.

The study’s authors also point out that more homeowners are likely to incorporate home equity into their retirement plans, instead of tapping it for emergencies only. “It is likely the reverse mortgage option will be considered alongside some of the more traditional methods of saving and investment,” said Barbara Stucki, vice president for home equity initiatives at the National Council on Aging.

The study also included a consumer guide to reverse mortgages.

At what point would you consider a reverse mortgage?

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Mortgages — Changes in Federal Housing Administration Fees

In a nutshell, here is what’s happening: Fees for refinancings will fall sharply, as the upfront mortgage insurance decreases to 0.01 percent of the base loan amount, from 1 percent, starting on June 11. For buyers, the upfront mortgage insurance premium will increase to 1.7 percent of the loan amount, from 1 percent, effective April 9, and annual insurance costs, paid monthly, will rise 0.10 percentage points. Those with so-called jumbo loans, those above $625,500, will see a 0.35-percentage-point jump in the annual insurance premium, effective June 1.

The F.H.A. announced these changes over the last several weeks; they reflect an Obama administration initiative to make refinancing easier and more affordable for the three million or so homeowners with F.H.A. mortgages. The reduction in refinancing fees applies to those borrowers who are current on payments.

Charles Coulter, the deputy assistant secretary for single-family housing at the Department of Housing and Urban Development, said the changes were intended in part to shore up the insurance fund, “while having a minimum impact on the borrowers’ payments.” The higher fees could add more than $1 billion to the fund through fiscal year 2013, HUD said in an announcement.

The F.H.A.’s market share has risen sharply in recent years as subprime lenders and others left the business during the housing crisis, or were forced out. F.H.A.-insured mortgages represented almost a third of all mortgages in 2011, and as many as 47 percent in the second quarter of 2010, according to HUD data.

From a recent low of 1.8 percent in 2006, F.H.A.’s loan volume grew to a high of 20.4 percent of all mortgage originations in 2009, and last year it insured 15.2 percent based on dollar volume, according to data from Inside Mortgage Finance, an industry publication. In the last three years, F.H.A.’s volume was about four times its levels of 2005 and 2006.

“That is tremendous growth in just five years,” said Terence Floyd, a vice president of People’s United Bank in Bridgeport, Conn. F.H.A. loans appeal to first-timers who otherwise could not afford to buy, he noted, adding, “They don’t have 20 percent to put down.”

Loans insured by the F.H.A. require only a 3.5 percent down payment for borrowers with a credit score above 580; those with a score of 500 to 580 need at least 10 percent down. Some lenders require higher scores. For instance, Somerset Hills Bank in Madison, N.J., looks for a score of at least 640 for an F.H.A loan, according to Jody Tobia, a senior vice president.

Mr. Tobia says he expects many borrowers to continue with F.H.A. loans despite the higher fees, because of the low down payment and the ability to wrap the upfront insurance fee into the initial loan balance.

While some lenders consider F.H.A. “the only game in town” for first-time buyers of modest means, there are other options. Some credit unions, including New York Municipal Credit Union, are offering mortgages with a 5 percent down payment, said Daryl Newkirk, a mortgage loan originator at the New York credit union. The loans are for single-family homes; buyers must have a credit score of 660 or higher. Mr. Newkirk said that about half the borrowers who come to New York Municipal Credit Union are looking for mortgages with down payments of 5 percent or less.

For first-time buyers, determining a maximum affordable monthly payment is key. F.H.A. mortgage insurance premiums are added into the principal, along with interest and escrowed taxes and insurance amounts. HUD estimated that the annual premium increase will add, on average, $5 a month to consumers’ mortgage costs. Some low-income buyers, however, may be eligible for grants or other assistance to cover some of their closing costs.

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Mortgages - Shopping for Loans Online

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Peter Carroll, the acting assistant director for mortgage markets at the newly formed Consumer Financial Protection Bureau, suggests that borrowers begin the process by reading the fine print of each site they choose to work with. “Understand the terms of use and privacy policies,” Mr. Carroll said.

If you are shopping for loan rates on sites like Bankrate.com or LendingTree, also be sure to read their “frequently asked questions” section, industry experts say — and recognize, too, that these sites are businesses that make money by working with lenders, via a pay-per-click formula or by generating leads.

If you provide personal information, including your credit score, find out how widely that material will be circulated. As Mr. Carroll put it, “Understand that many lenders may be contacting you.”

At Zillow Mortgage Marketplace, the average number of rate quotes customers receive is 20, while at LendingTree it is 3 to 5, according to both companies.

Most sites provide rates and other information only from lenders that are signed on as their customers. One exception is Bankrate.com, which offers one table that includes its lending clients as well as the five largest banks and other lenders in some 600 local or metropolitan areas.

The online mortgage marketplace has become increasingly popular for borrowers researching loan rates and options. Some 1,200 mortgage-related Web sites are tracked by Experian Hitwise, and the top seven sites drew more than 22 million total domestic visits in April, up 24 percent from a year earlier and 74 percent from April 2010. The numbers are expected to grow with the wider use of smartphones and other devices.

Doug Lebda, the chief executive and founder of LendingTree.com, noted that for the last three years, the difference between the highest and lowest rates available was “wider than it has been in recent history,” making comparison-shopping even more important. But he also pointed out that the advertised rates are “indicative rates but they’re certainly not offers.”

Mr. Lebda suggested that borrowers also consider the mortgage initiation fee and closing costs.

As they navigate through online mortgage sites, borrowers will need to find out the sites’ criteria for matching them up with lenders, and whether lenders can pay for higher placement. That’s where reading the fine print may come in.

“Make sure you feel you’re in control,” said Erin Lantz, the director of Zillow Mortgage Marketplace. That way you can give your personal information out to lenders of your choice.

And if a credit report is pulled by lenders, Mr. Carroll added, find out “what rights do they have to that information besides evaluating that loan request?”

Borrowers will also want to learn about quality control at the sites they visit. Bankrate.com, for example, has a 40-person quality-control department that investigates consumer complaints and does what is known as “mystery shop” on various sites. LendingTree says it relies partly on consumer ratings and reviews, as does Zillow Mortgage Marketplace. It has more than 10,000 reviews to date, Ms. Lantz said, adding that the reviews are also vetted to ensure they are not from any lenders.

Mortgage shopping sites will often advertise that they are making comparisons easier and faster for borrowers, but that could be counterproductive, said Sue Berkowitz, the director of the South Carolina Appleseed Legal Justice Center, which advocates for greater disclosures by these companies. “It should be time-consuming, and done with analysis.”

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