Article By: Jim Porter – September 29, 2023
The phrase “payment shock” has been used by mortgage companies forever. Underwriters and loan officers will consider this when making a loan approval decision.
If a first-time homebuyer has been renting at $2,000 per month for the past three years and is now looking at a house payment of $4,000, an underwriter might question this homebuyer’s ability to handle the payment shock. This payment shock is especially troubling to an underwriter if the borrower has not been able to save any money over the past three years and hasn’t had any substantial pay raises recently.
Traditionally, student loan payments are deferred while the borrowers are still in school but once they get out, monthly payments become due. This is not supposed to be a payment shock because the whole point of the tuition and the school is once the person graduates, they can get a skilled job that pays enough to pay off the student loans.
Some economists are suggesting these student loan payments that are now due will increase the chances of a recession. Many of these borrowers have enjoyed the past three years of deferred student loan payments, free government money and stimulus. Many now have larger car loan payments and credit card balances that they took on while having no student loan payments, and some were really hoping for this debt to be forgiven.
There is some good news for debtors that are shocked about their payments now due. The current government is allowing the borrowers a one-year “on ramp” period to begin paying. The interest will start to accrue immediately but nothing negative will show up on the credit bureaus for the folks that don’t pay over the next 12 months.
As a loan officer that has witnessed a couple thousand successful student loan stories and sadly a couple thousand disastrous ones, the best advice I can give to those with federally insured student loan debt, is communicate with the loan servicer and avoid default because there is no getting out of this debt. Bankruptcy provides no relief from federally insured loans, and you cannot hide because the Feds will find you unless you work under the table for your whole life.
There are certain government and nonprofit jobs that can provide student loan debt forgiveness for employees that stay on the job for 10 years as an incentive to attract good people to challenging professions at places like Napa State Hospital, but for most people, you are stuck with the debt till death.
For those folks that are considering taking on student loan debt, my advice is look before you leap. A couple years ago, we had a 28-year-old potential client that was hoping to buy a house with more than $320,000 in student loan debt and the best job she could find as an architect paid $72,000 per year.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
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