Do Parent PLUS Loans Affect Getting a Morgage? Yes, Here's How

If you’re a parent who’s used a Parent PLUS Loan to support your child’s education, you might be curious about how this could impact your mortgage prospects. The answer is it can. This loan shows up as a new debt on your credit report, potentially nudging your credit score downwards. Furthermore, it enters your debt-to-income calculation and existing debts like credit cards and auto loans.

That’s not the end of the story, though.

Parent PLUS Loans, designed specifically for undergraduates’ parents, aren’t like the federal student loans that students receive. They require a hard credit check at the loan application stage. But don’t mistake this for a good credit test. Rather, the government checks for adverse credit history elements, such as a collection account.

As for your student loan payment history?

It also finds its way onto your credit report. Missed payments could drag your credit score lower, but regular, timely payments can actually help you build your credit. So as you navigate your child’s education costs alongside your home ownership dreams, knowing the effects of Parent PLUS Loans on your financial picture is critical.

Related: Do Student Loans Affect Buying a House?

Yes, Parent PLUS Loans do influence your debt-to-income ratio (DTI). When a parent borrows a Parent PLUS Loan to fund their child’s education, this new debt is factored into their DTI. Importantly, this effect is only for the borrowing parent – the other parent and the child are not impacted, and their credit scores remain unaffected.

How Parent PLUS Loans Are Included In Your DTI

As with all types of loans, the repayments for Parent PLUS Loans are factored into your DTI. When mortgage lenders assess your ability to repay, they will account for these loans in your overall debt portfolio.

An Example of How Parent PLUS Loans Affect DTI

Assume you have a gross monthly income of $7,000 and the following monthly debt payments:

• Mortgage loan: $2,000

• Parent PLUS Loan: $800

• Auto loan: $500

• Credit cards: $200

These payments culminate in a total monthly debt of $3,500, creating a DTI of around 50%. This percentage is a critical threshold for mortgage qualification — let’s dig into why.

Related: Buying a House With $100k Student Loans

Parent PLUS Loans and the 43% Rule

Why are we focused on this 43% rule for DTI? Here are the key points:

• A 43% DTI is the highest ratio a borrower can have to still qualify for a mortgage.

• Lenders ideally prefer a DTI lower than 36%.

• No more than 28% of your debt should be allocated to servicing a mortgage or rent payment.

• The lower your DTI, the better your chances of securing approval or serious consideration from lenders.

How Excluding Parent PLUS Loans from Your DTI Calculation Affects Your Mortgage Eligibility

Let’s assume we don’t have the Parent PLUS Loan debt.

Your total monthly payment would then drop to $2,700, and your DTI would reduce to about 39%. This figure is comfortably below the 43% rule threshold, which enhances your chances of qualifying for a mortgage.

By illustrating this scenario, we highlight the considerable impact Parent PLUS Loans can have on your DTI. They may sway your prospects of securing a mortgage more than you might think.

Related: Mortgage Denied Due to Student Loans

Like any other loan, a Parent PLUS Loan can influence your credit score, affecting your eligibility for a mortgage.

When a parent applies for this loan, it’s issued under their name and reported to credit bureaus accordingly. The process includes a credit check, which can temporarily lower your score. Moreover, the loan, with a balance equal to the original amount, appears as a new account on your credit report. All these factors can contribute to a lower credit score.

But it’s not all negative. Timely loan repayments can help to build credit.

But be aware. Any missed payment will be reported under the parent’s name who took out the loan, even if there’s an agreement that the child will repay it. If you foresee any difficulties in repayment, contact your loan servicer.

Options like pausing payments or switching to different repayment plans can be beneficial. For instance, consolidating your Parent PLUS Loan with a Direct Consolidation Loan allows for an income-contingent repayment plan, adjusting your payments based on your income.

Related: IBR Student Loans and Mortgage

When considering home buying, remember that a Parent PLUS Loan isn’t just an avenue to fund your child’s education – it also plays a substantial role in determining your credit score and, consequently, your mortgage eligibility.

Improving your debt-to-income ratio is key to boosting your chances of mortgage approval. Here are some strategies for parents with Parent PLUS Loans:

1. Accelerate Your Payments: If feasible, make additional payments to reduce your loan balance more quickly. This could decrease your monthly obligations and improve your DTI.

2. Income-Driven Repayment Plan: By consolidating your Parent PLUS Loans into a Direct Consolidation Loan, you may qualify for an income-contingent repayment plan. This could lower your DTI by adjusting your payments to your income and family size. You might explore the double consolidation loophole for an even lower monthly payment amount.

3. Boost Your Income: While easier said than done, finding ways to augment your income can improve your DTI.

4. Decrease Other Debts: If possible, try to lower other high-interest debts, such as credit card balances. This could also help decrease your DTI.

If your credit history is solid or you have a cosigner who can vouch for you, consider refinancing your Parent PLUS Loans with a private lender. A strong credit profile could help you secure a refinance loan with a lower interest rate and an extended repayment term, reducing your monthly payments and, in turn, enhancing your DTI.

An added bonus? Refinancing may offer an opportunity to transfer the loan to the student you originally borrowed for or even to the other parent.

But tread carefully. Refinancing parent loans into a private student loan means saying goodbye to certain federal loan benefits provided by the Department of Education, such as deferment, forbearance, and student loan forgiveness programs.

Related: Can a Parent PLUS Loan Be Transferred to the Student?

Note: Before making any significant changes to your loans or repayment strategies, always consult with a financial advisor or your loan servicer.

Navigating the financial landscape as a parent with Parent PLUS Loans can be complex, especially when considering home ownership.

Remember, these loans can influence your credit score and debt-to-income ratio, key factors in securing a mortgage. Understanding how these loans affect your financial profile is the first step.

From there, consider strategies like timely loan repayments, income-based repayment plans, or even refinancing to manage your financial obligations effectively. And always consult with a financial advisor before making significant changes to your loans.

As you balance your child’s education costs with your home ownership dreams, informed decision-making is your most powerful tool.