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Q. I had to take a forbearance on my student loans about five years ago. I’m in much better financial shape now, and I want to buy a place. Will the forbearance affect my ability to get a mortgage or pass the co-op board approval?
A. One thing's for sure: you’re not alone. A growing number of college grads, yoked to their student debt, are having trouble coming up with the money to buy—and in some cases, rent—apartments in the city, as the New York Times recently reported. The good news? Assuming your financial troubles are behind you and you can afford to buy now, our experts say a past forbearance won't necessarily doom your chances of getting a mortgage or being approved by a co-op board.
“The forbearance of payment on your student loan from five years ago shouldn’t, in itself, be reason to undermine your ability to obtain financing or co-op board approval,” says real estate broker Gordon Roberts of Warburg Realty. “If you’ve resumed regular on-time payments, you should be fine.”
Getting a mortgage
The big issue where a mortgage is concerned, as Roberts and other experts note, is your debt-to-income ratio. With a forbearance, it’s usually up to the lender’s discretion to put your payments on hold for a period of up to 12 months (unless they exceed 20 percent of your gross monthly income, or if you’re part of certain military, teaching or medical residency programs, in which case a lender is required to let you forbear). But unlike a deferment, which essentially stops the clock on your loan, with a forbearance, interest continues to accrue.
The upshot? Your loan balance likely went up, so your debt-to-income ratio is probably less favorable. For most mortgages, the maximum debt-to-income ratio is 45 percent.
If you’re back to making regular payments, though, a bank won’t treat them any differently than it would without a forbearance in your past. “We will just take the monthly payment that they are paying as a liability on their debt-to-income ratio just like any liability,” says mortgage banker Robbie Gendels of National Cooperative Bank.
(If a loan is still in forbearance, the bank will calculate a minimum monthly payment and add that to the list of your debts. For example, NCB assumes a monthly payment of 2 percent of the outstanding balance, so if you owe $3,000 on your student loan, they’d estimate an extra $60 a month on the debt side of your debt-to-income ratio, even if you're not sending the student loan lender regular checks.)
Passing the board
As for the co-op board, they’ll also look at your debt-to-income ratio, as well as the circumstances of the forbearance. Whether a board approves your application will depend on the reason behind it, how long it lasted, whether you made up the missed payments, and what the rest of your credit profile looks like, explains Deanna Kory, a broker at the Corcoran Group.
“If you just didn’t pay because you did not have the money, that may not be looked upon kindly," says Kory. "If you tried to work things out or suffered a job loss or something impacted you to cause you not to be able to pay that makes sense, then it may work. … They need to have a logical explanation and sense that you are and will be responsible in the future.”
Additionally, most boards want to see “ample income to comfortably cover all your monthly obligations,” including mortgage payments and maintenance fees, as well as cash on hand to cover emergencies or the loss of a job, Warburg's Roberts says.
Steps to take first
Before you even apply for a mortgage—let alone put in a board application—it’s best to check your credit history to see what shows up and make sure it’s accurate.
You can calculate your debt-to-income ratio with various online calculators; remember to add up credit card bills, auto finance, alimony or child support, student loans, and any other debt that shows on your credit report, Roberts says. You may also want to consult with a financial planner who will be upfront about what you can afford, he adds.
If necessary, hire a credit repair company to “untangle credit obligations and resolve outstanding debt,” says real estate broker Shirley Hackel of Warburg Realty. “The credit repair company may be able to negotiate with the student loan lender to reduce your balance owed and repair any damage done to your credit score.”
Other strategies: Write a letter to the co-op board explaining how you’ll continue to handle the situation, Hackel suggests. Or you could offer to put a year’s worth of maintenance fees in escrow so the board will be assured you can pay it, and they can hold it until they are confident you’re a financially stable owner, Kory says.
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