How to Qualify For a Mortgage When You Have Student Loans

A lot of first-time homebuyers who graduated in the last few years have one big question to answer –

“How to qualify for a mortgage when you have student loans”?

That’s exactly what I answered in this blog post.

The guidelines differ depending on which kind of loan program you are trying to qualify for, so let’s look at each one.

Conforming Loans

These loans are backed by government agencies – Fannie Mae and Freddie Mac.

Fannie Mae: For all student loans, use the payment on the credit report. If the payment is unknown, use either 1% of the balance, a fully amortizing payment using the actual documented repayment terms, or $0 for Income-Based Repayment with documentation to evidence the $0 payment.

Freddie Mac: For all student loans, use the actual documented payment. If the payment is not known, use 0.5% of the balance. If the student loan is income-based repayment, the loan does not need to be included in the debt ratio calculation. If in deferment or forbearance, and the full balance of the student loan will be forgiven, canceled, or discharged, then no payment needs to be added for debt-to-income ratio calculations.

USDA Loans

USDA Loans have specific rules regarding student loans. Fixed Payment Loans and Non-Fixed Payment Loans are treated differently, with specific rules for calculating the debt ratio for each.

Fixed Payment Loans – A permanent amortized, fixed payment may be used in the debt ratio when documentation verifies the payment is fixed, the interest rate is fixed, and the repayment term is fixed.

Non-Fixed Payment Loans: For deferred loans, Income-Based Repayment (IBR), Graduated, Adjustable, and other types of repayment agreements that are not fixed, use 1% of the balance on the credit report. No additional documentation is required.

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FHA Loans

All student loans must be included in the borrower’s liabilities regardless of the payment type or status of payments. The debt to income calculation must be calculated using:

1. The actual documented payment provided the payment will fully amortize the loan over its term or
2. The greater of 0.5% of the outstanding balance on the loan or the monthly payment reported on the borrower’s credit report.

VA Loans 

The rules for VA Loans are slightly more complex and depend on whether the student loans are deferred or in repayment. No monthly payment is needed for student loans that can be documented as deferred at least 12 months beyond the closing date. If a student loan is in repayment or scheduled to begin repayment within 12 months of the closing date, then a monthly payment must be established and included as a liability based on the following steps:

1. Calculate each loan at a rate of 5% of the outstanding balance and then divide it by 12 to arrive at the monthly payment for the debt ratio.
2. Use the payment(s) on the credit report for each student loan that is reported as greater than the threshold payment calculation.
3. If the payment reported on the credit report is less than the threshold payment calculation, the loan file must contain a statement from the student loan servicer that reflects the actual loan terms and payment information for each student loan. The statement(s) must be dated within 60 days of the VA loan closing.

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