If you have student loans and are thinking about buying a home, you may be wondering: Will my student loan debt prevent me from qualifying for a mortgage?
Having student loans does not automatically prevent you from qualifying for a home loan. What matters is how your student loan payment is counted along with your income, credit, other monthly obligations, and proposed housing payment.
Here is something many homebuyers don't realize: Fannie Mae, Freddie Mac, FHA, and VA do not always calculate student loan payments the same way.
That means the same borrower, with the same student loan balance, may have a different qualifying payment depending on the mortgage program being used.
Let's make this easy to understand by answering the question most homebuyers really want answered:
What student loan payment will the lender actually count when I apply for a mortgage?
One of the calculations used when qualifying for a mortgage is your debt-to-income ratio, commonly called DTI.
Your DTI compares certain monthly financial obligations with your qualifying monthly income. Those obligations may include:
For mortgage qualification, the question isn't simply, "How much do you owe in student loans?" We also need to determine what monthly student loan payment must be included in your DTI.
That answer can change depending on the mortgage program.
If your credit report shows an actual monthly student loan payment:
That payment is generally used for mortgage qualification. If the payment shown on the credit report is incorrect, acceptable student loan documentation may be used to verify the correct payment.
If your credit report shows $0 because you are on an income-driven repayment plan:
Documentation can be provided verifying that your required student loan payment is actually $0. If properly documented, Fannie Mae can use $0 as the monthly student loan payment for mortgage qualification.
If your student loan is deferred or in forbearance:
Different rules apply. Fannie Mae generally allows the lender to use either 1% of the outstanding student loan balance or a fully amortizing payment based on the documented repayment terms.
The important point: A $0 payment on your credit report does not automatically mean the lender can use $0. If the $0 payment is based on an income-driven repayment plan, documentation is needed to verify that $0 is actually your required payment.
If your credit report shows an actual student loan payment greater than $0:
That payment is generally used for mortgage qualification. If the payment shown on the credit report is incorrect, acceptable documentation may be used to verify a different current payment greater than $0.
If your credit report shows as deferred or a $0 student loan payment:
Freddie Mac generally requires the lender to use 0.5% of the outstanding student loan balance as the monthly qualifying payment.
Example: If you owe $50,000 in student loans and your credit report shows a $0 payment, 0.5% of $50,000 equals a $250 monthly qualifying payment.
The important difference: Freddie Mac does not generally allow a documented $0 income-driven repayment payment to be used as $0 the way Fannie Mae does. This is one reason it can be important to evaluate which conventional underwriting program is appropriate for the borrower. Your loan officer will be able to guide you.
FHA's student loan calculation is fairly straightforward.
If your credit report shows a student loan payment greater than $0:
FHA generally uses the monthly payment shown on the credit report or an acceptable documented payment. If what is shown is not accurate, the actual agreed upon repayment terms can be used to update your loan file.
If your credit report shows as deferred or as a $0 student loan payment:
FHA generally requires the lender to use 0.5% of the outstanding student loan balance as the monthly qualifying payment.
Example: If you owe $50,000 in student loans and your credit report shows a $0 payment:
$50,000 × 0.5% = $250 per month
In plain English: If FHA sees a $0 payment, the lender generally cannot simply ignore the student loan. Using our $50,000 example, FHA would generally count $250 per month when calculating your mortgage qualification.
VA handles student loans differently, so there are two questions we need to answer.
Question #1: Is the student loan deferred for at least 12 months beyond the closing date of the VA mortgage?
If the borrower provides written evidence showing that the student loan will remain deferred for at least 12 months beyond the VA loan closing date, the student loan payment does not have to be included in the monthly debt calculation.
Question #2: What happens if repayment will begin within 12 months of closing?
If the student loan is currently in repayment or repayment is scheduled to begin within 12 months of the VA loan closing, the lender must consider the student loan obligation.
VA has its own calculation:
Student Loan Balance × 5% ÷ 12
For example, let's use the same $50,000 student loan balance:
$50,000 × 5% = $2,500
$2,500 ÷ 12 = $208.33 per month
In this example, the VA calculation produces a monthly amount of $208.33.
If the payment shown on the credit report is higher than the VA calculated amount:
The lender uses the higher payment shown on the credit report.
If the payment shown on the credit report is lower than the VA calculated amount:
The lender may be able to use the lower payment when the required documentation from the student loan servicer verifies the actual loan terms and payment information.
The important point: With VA financing, simply knowing that your student loan is deferred isn't enough. We need to know when the deferment ends in relation to your VA mortgage closing date.
The examples above show why I don't look at a student loan balance and automatically decide whether someone can or cannot qualify for a mortgage.
We need to know:
The details matter because the payment used for mortgage qualification can affect your debt-to-income ratio and, ultimately, your purchasing power.
No. Having student loans does not automatically prevent you from qualifying for a mortgage.
Your student loan is only one part of your overall financial picture. Your income, credit, assets, other debts, proposed housing payment, and the mortgage program being used all need to be evaluated together.
That is why I don't want potential homebuyers disqualifying themselves before having their numbers reviewed. You may already qualify. We may discover that one mortgage program treats your student loan situation more favorably than another, or that a specialty program may offer an even better fit.
Altitude Home Loans offers a Medical Program as one of our specialty loan programs for qualified medical professionals. Depending on the program guidelines and the borrower's qualifications, student loan debt may be treated differently and may even be excluded from the debt-to-income calculation.
This is why working with a loan officer who understands the different mortgage programs is so important. The goal is to make sure your overall debt-to-income ratio is calculated accurately and that the loan program being considered is the one that best fits your complete financial picture.
Or, if you are not quite ready to purchase, we may identify something you can work on first.
Replace assumptions with information.
I created my Buyer Ready Service™ because I believe you should understand your financing before you begin making major homebuying decisions.
If you have student loans, I can review how those loans may need to be calculated under the mortgage programs we are considering and show you how the payment affects your overall qualification.
My goal isn't simply to tell you whether you qualify. I want you to understand why.
If you aren't ready today, we can identify the areas that may need attention and create a plan for moving forward.
Student loans are part of your financial picture, but they do not automatically determine whether homeownership is possible.
If you are considering buying a home in Arizona and want to understand how your student loans may affect your mortgage qualification, let's look at your complete financial picture together.
Learn More About My Buyer Ready Service™
Karen Jones |
About Karen JonesKaren Jones is a Certified Mortgage Loan Advisor, RCS-D, and Senior Mortgage Loan Officer with Altitude Home Loans in Scottsdale, Arizona. With more than 40 years of experience in financial services, Karen is passionate about educating Arizona homebuyers and homeowners so they can make informed, confident decisions about home financing. She created the Buyer Ready Service™ to help buyers understand their financing options and prepare for homeownership before beginning their home search. NMLS #307015. Have a mortgage question? Call Karen at 480-290-4277. HomeLoansByKarenJones.com Karen Jones |
Educational Information: Mortgage guidelines are subject to change and may vary based upon the borrower's circumstances, automated underwriting findings, lender or investor requirements, and other factors. The examples provided in this article are for educational purposes only and do not represent a mortgage approval or commitment to lend.
The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Karen Jones does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Karen Jones will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.
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