Student Loans

A common question people applying for home mortgage loans is does student loan debt affect getting a mortgage?

A resounding YES it does.

Student loan debt, just like any other debt, car loans, boat loans, credit cards, etc., are all added to a home buyers debt-to-income ratio. This is simply a factor of dividing your pre-tax income by the total amount of all your other debt, including what the new home payment might be.  We do not factor in things that typically do not appear on your credit report, like a cell phone bill, car insurance, or utilities like gas or electric.

Mortgage lenders have rules about having too much debt, as it could obviously make making on time payments problematic. If you are over the debt ratio limit, which does vary from loan to loan, your loan application will get denied, or the lender may tell you that you can only qualify for a smaller loan amount.

How and what we calculate for a payment depends on the type of loan you are applying for.

If you are making regular payments on the student loans

If a monthly payment is showing on the credit report, we use the payment showing on the credit report for both Fannie Mae and Freddie Mac loans.

FHA loans use the greater of the actual payment OR 1% of the outstanding balance. Plain and simple, WHICHEVER IS GREATER.

USDA Loans (updated Nov 2022): Revised to indicate that for all outstanding student loans, regardless of the payment status, lenders must use: • The payment amount reported on the credit report or the actual documented payment, when the payment is above zero; or • One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, when the payment amount is zero.

VA loan guidelines says if a payment is reporting on the credit report, but is less than the payment on the standard formula, you must get written proof of the lower payment, or use the 1/12th of 5% of the balance rule.

If the student loans are deferred

First understand that while a student loan may be deferred today, lender reasoning is that eventually you will have to start making a payment. Therefore we must calculate an estimated payment into your debt-to-income ratio for loan qualifying.

A plain vanilla Fannie Mae conventional loan, the minimum monthly payment is calculated at 1% of the outstanding balance. For example, a $50,000 student loan balance would results in a $500 payment into your debt ratio for mortgage loan qualifying purposes.

Freddie Mac - The payment is calculated at 0.50% of the outstanding balance. So a sample $50,000 loan results in a $250 payment. As you can imagine, for this reason, we underwrite a lot of people with student loans to Freddie Mac guidelines.

FHA Loans use 1/2% (0.50%) of the outstanding balance. So a sample $50,000 loan balance would have a $250 payment added to your debt ratio

USDA Loans (updated Nov 2022): Revised to indicate that for all outstanding student loans, regardless of the payment status, lenders must use: • The payment amount reported on the credit report or the actual documented payment, when the payment is above zero; or • One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, when the payment amount is zero.

VA loans will treat the deferred balance at 1/12th of 5% of the loan, so the same $50,000 loan results in a payment of $209.  Take your existing balance times 5%.  then divide that amount by 12 to get what lenders will use for a monthly student loan payment. Student loans deferred more than 12 months past your loans closing date do not need to be included.

If you are making income based payments on the student loans

Fannie Mae and Freddie Mac loans: The lender may use documentation from the student loan company to verify the current payment if it is different that what the credit report says.   If the student loan payment on said documentation is $0, the lender may qualify the applicant with $0 payment.

FHA loans: Lender can now use income-based repayment on student loans for FHA loans. IBR payments of zero monthly payments can also be used. Applicants must provide documentation directly from their student loan servicer indicating the current payment - even if zero.

USDA Loans (updated Nov 2022): Revised to indicate that for all outstanding student loans, regardless of the payment status, lenders must use: • The payment amount reported on the credit report or the actual documented payment, when the payment is above zero; or • One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, when the payment amount is zero.

Ready To See What You Qualify For Even With Student Loans?

We make it simple. No costs, no obligations.  Simply click here to APPLY ONLINE or via your Smartphone. Our professional Licensed Loan Officers with quickly review your information to let you know what loan amounts, and what mortgage programs you qualify for when factoring in your student loans.