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  • Student Loans and Qualifying for a Mortgage

    A common question people applying for home mortgage loans is how does student loan debt affect their deferred student loan effect mortgage qualifying?

    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.

    Student loan debt ratio

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


    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.

    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: For non-fixed payment loans, which means payments on deferred loans, income based repayment, income contingent, graduated, and adjustable, either

    1. 1/2 percent of the (0.50%) outstanding loan balance
    2. The current documented payment

    For plain vanilla conventional Freddie Mac backed loans, 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.

    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.

    If you are making payments on the student loans

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

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

    USDA loans, for fixed rate permanent payment that is fully amortized, use the actual payment.

    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.

    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.