So you’re paying off student loans, but you’re also eager to buy a home. The good news is that even with student loans, you can qualify for a mortgage if you meet certain loan requirements, including the maximum debt-to-income ratio (DTI). Here’s how student loans typically impact this number.
Debt to Income Ratio and Student Loans
Student loan debt is often seen in the DTI ratio, a formula that mortgage lenders use to help assess your creditworthiness as a borrower. This ratio is calculated by dividing your monthly debt payments by your total monthly income, which results in a percentage value that lenders then examine to assess your ability to pay off a mortgage.
If you have a car loan and student loan payments, for example, your mortgage lender will add these amounts to your proposed mortgage payment and then divide that total by your total monthly income.
In general, the result should not exceed 43 percent, but some lenders look for a lower percentage, 36 percent, while others may accept up to 50 percent.
“Maximum DTI rates are typically set at 43 percent, depending on whether it’s a government-backed loan,” explains Leslie Taine, an attorney in Melville, New York. “This means that your monthly debt obligations divided by your monthly income should not exceed 43 percent for the best odds of loan approval. Those with higher incomes, lower loan amounts and lower total debt will have a lower DTI, which increases your odds of loan approval.” .
Guidance by loan type
|Fannie Mae||Pay off your monthly student loan as listed on your credit report or student loan statement; In case of deferment or repayment, either 1% of the balance or one monthly payment|
|Freddy Mac||Pay off your monthly student loan as listed on your credit report or student loan statement; 0.5% of the balance in case it is delayed or impatient|
|FHA||Pay off your monthly student loan as listed on your credit report or student loan statement; In case of deferment or repayment, either 0.5% of the balance or one monthly payment|
|will||Pay off your monthly student loan as listed on your credit report or student loan statement or 5% of the balance divided by 12 months, whichever is higher; If it is postponed, and not included in the subscription|
|USDA||Pay off your monthly student loan as listed on your credit report or student loan statement; If deferred, charged or on an IDR plan, either 0.5% of the balance or one monthly payment|
Traditional Mortgage Guidelines for Student Loans
Each type of mortgage loan has guidelines when it comes to student loans and your DTI ratio. If you’re applying for a conventional loan—many of which are matching loans, meaning they adhere to Fannie Mae and Freddie Mac standards—you can expect student loans to be included in your DTI ratio.
Fannie Mae’s Tips
If your credit report lists your monthly student loan payment, your mortgage lender can use the amount on the report to underwrite, per Fannie Mae’s guidelines. If your credit report does not include those payments, or shows the incorrect amount, your lender can include them on your DTI by reviewing your last student loan statement instead. The lender can also use your student loan statement if you follow an income-driven repayment plan.
“A mortgage lender can obtain documentation to verify that your monthly obligations are $0” in the case of income-based payments, says Tayne.
What Happens If Your Student Loans Are Forgotten or Deferred? Based on Fannie Mae’s guidelines, a lender can transfer either 1 percent of the remaining student loan balance to your DTI, or a single payment based on what is stated in the student loan repayment terms.
Freddy Mac’s Guidelines
Freddie Mac’s student loan guidelines are similar to Fannie Mae’s, except for one key difference: If your loans are forgiving or deferred, or your payments are documented as $0, a lender can credit only 0.5 percent of your student loan balance to a DTI calculator.
What if you are about to pay off your student loans? Both Fannie Mae and Freddie Mac’s guidelines address this. In general, if you have 10 months or less remaining in your repayment plan, your lender can choose not to include your student loans in the DTI ratio at all. This may also be the case if your student loans are fully set. In either scenario, you will have to prove this with your student loan data.
FHA Mortgage Guidelines for Student Loans
FHA loans also have guidelines on student loans and the DTI ratio. As with a traditional loan, your student loans will be considered for your debt obligations, and the lender will derive the monthly payment amount from your credit report or student loan statement.
“FHA lenders prefer 43 percent or less of a DTI, but they can be more flexible if you have additional cash reserves and higher credit scores,” notes Tyne.
However, if your loans are deferred or deferred, or you are on an income-driven payment plan, the mortgage lender must take into account either: 0.5 percent of the remaining balance of your student loans if your current monthly payment is $0; The monthly payment listed on your credit report; Or the actual repayment as shown on your student loan statement.
VA Mortgage Guidelines for Student Loans
If you are an active military member, veteran, surviving spouse, or other qualified borrower, you may consider getting a VA loan. With a VA loan, student loan guidelines are somewhat different from those for other types of mortgages.
First, VA loan lenders typically look for a DTI of no more than 41 percent. However, VA loans do not require that student loan payments be included in your DTI ratio if those payments are to be deferred for at least 12 months after the closing date of your VA loan.
On the other hand, if you are currently making student loan payments or expect to be within 12 months of the closing date, the mortgage lender must do some math to come up with an estimated payment. This formula is 5 percent of the remaining student loan balance divided by 12 months.
If your student loan payment is already higher than that, that’s what to use, according to Donnie Schulz, mortgage banker at Embrace Home Loans in Hauppauge, New York. If the student loan payment is lower, “the VA loan lender can use the actual payment — as long as they document the loan terms from your student loan lender,” says Schulze.
USDA Mortgage Guidelines for Student Loans
If you’re considering a USDA home loan and have student loans to pay off, there are also guidelines to consider.
Generally, lenders look for a DTI of 41 percent with a USDA loan, but it can exceed that in some circumstances. If you make fixed monthly payments on your student loans, your mortgage lender will take into account what is on your credit report or student loan statement for your DTI ratio.
If your student loans are deferred, or you are on an income-based repayment plan, however, your lender is required to account for 0.5 percent of the remaining student loan balance, or whatever the current payment is under your repayment plan.
How to get a mortgage when you have student loans
It’s important to know how your student loans can affect your mortgage options, but keep in mind that your DTI ratio is just one component of the underwriting process, and there are often compensating factors, such as credit score, that lenders use to determine Whether you qualify for that loan.
If you have student loans and want to improve your chances of getting a mortgage, here are some tips:
- Switch to an income-driven payment plan. “This can help lower your DTI and increase your odds of getting approved,” says Tayne. “It is a good idea to make this change for at least a year before applying for a mortgage loan.”
- Shop and choose a reputable lender that can help you Get pre-approved. “An experienced loan officer can discuss your student loan status with you and offer better structured financing programs to meet your budget goals,” Schulz says.
- It is considered Add co-borrower for loan. “Extra income always helps to get qualified,” explains Juan Carlos Cruz, founder of Brightwater Financial Group, headquartered in Brooklyn, New York. “This is an easy way to reduce your DTI — but make sure your co-borrower has little or no debt and a high credit score.”
- Expand your options. Consider buying a smaller or less expensive home, or perhaps in an affordable area.
- Wait for things. “Save enough for a larger down payment, reduce your debt, and allow any negative information on your credit report to age, which can enhance your likelihood of getting approved,” Tayne suggests.
Mortgage Options for Homebuyers with Student Loans
If you have student loans, there are several mortgage programs that you may qualify for.
- Fannie My Home is ready lend Low repayment option for low-income borrowers, with revocable mortgage insurance
- Freddie Mac Home Loan Similar low payment option for low-income borrowers, with flexibility to apply equity to down payment or closing costs
- FHA Loan Supported by the Federal Housing Administration (FHA) and requires only 3.5 percent down payment
- VA loan – For active duty and veterans, no down payment or mortgage insurance required
- USDA loan – for borrowers in the so-called “rural” areas; You can check eligibility through the USDA website