Applying for a Mortgage with Student Loans | Student Loan Guidelines
Debts are factors that affect debt-to-income ratios, which can be a hurdle when applying for a mortgage with student loans. Car payments and student loans can be the two biggest factors when calculating debt-to-income because of their amortization over such a short period. The student loan repayment qualifying factors depend on:
- FHA student loan guidelines.
- Conventional student loan guidelines.
- VA student loan guidelines.
- USDA student loan guidelines.
Student Loan Repayment Plans
If you have student loans, you can choose from different types of repayment plans. This is done by talking to your student loan providers and asking them about managing payments.
Student loan providers will offer repayment plans and estimates that can help debt-to-income ratios.
Examples of Repayment Plans
Some student loan repayment plan options:
- Income-contingent repayment (ICR).
- Standard repayment, pay as you earn (PAYE).
- Revised pay as you earn (REPAYE).
- Income-based repayment (IBR).
- Graduated repayment.
- Extended fixed repayment.
- Extended graduated repayment.
Some student loan providers may offer other terms of repayments. When choosing a repayment plan, it is important to pick a plan that is fully amortized and understanding how each loan program calculates the payment.
FHA Student Loan Guidelines
When qualifying for a FHA loan, debt-to-income ratio will be lower when choosing a repayment plan that is the lowest monthly payment (fully amortized). This is not always the best option when paying off student loan debt, but will help lower the debt-to-income when qualifying for an FHA loan with student.
FHA student loan guidelines, regardless of the payment status, the mortgagee will use:
The greater of:
- When the monthly payment is zero on the credit report, 0.5 percent of the outstanding balance; or
- When the payment amount is above zero, the actual documented payment or the payment amount reported on the credit report.
FHA Student Loan Guidelines Documentation
If the payment for student loans is shown on the credit report, no further documentation is required.
If the credit report does not reflect a monthly payment for the loan, or the payment reported is greater than the payment reflecting on the credit report:
- The mortgagee will need a copy of the loan agreement/payment statement in order to verify the monthly payment.
If the loan statement/agreement or credit report shows a deferred payment for installment loan, the mortgagee must have written documentation of the deferral of the liability from the creditor with an outstanding balance and term of the installment loan.
If the actual monthly payment is not available for the installment loan, the mortgagee must use .5 percent of the outstanding balance to establish the monthly payment.
Conventional Student Loan Guidelines
In order to increase your chances of a higher mortgage payment approval, you should choose a repayment plan with the lowest monthly payment that is fully amortized.
When a credit report does not reflect a monthly payment for student loans or if it reflects $0 as the monthly payment, the lender must use the following to determine the monthly payment:
When there is an income driven repayment plan, the lender may obtain documentation to verify the payment is actually $0.
- The lender can use $0 for the payment if it is an income driven repayment plan.
Deferred or in Forbearance
When a loan is deferred or in forbearance, the lender will calculate the monthly payment equal to:
- Fannie Mae will use 1% of the outstanding balance.
- Freddie Mac will use .5% of the outstanding balance (even if the amount is lower than the actual fully amortized statement); or
- Documentation for the loan repayment terms reflecting fully amortized.
VA Student Loan Guidelines
Lenders that use VA student loan guidelines consider the anticipated monthly debt obligation if the student loan repayments are scheduled to begin within 12 months of the VA closing. VA student loan guidelines state that when the deferred student loans can be deferred outside that period, with evidence, the debt does not need to be considered.
All student loans that are scheduled to begin in the next 12 months must be calculated by using 5 percent of the outstanding balance and dividing it by 12.
- Example: $30,000 x .05 = $1,500 and then divide by 12.
USDA Student Loan Guidelines
Location of the property must be in a USDA approved area and the borrower needs to qualify for a USDA loan. Deferred student loans are not exempt. The lender will either use .5% of the outstanding balance or the loan needs to be fully amortized with a monthly payment statement/agreement when calculating debt-to-income ratios for USDA loans with student loans.
Avoid Lender Overlays
Lenders often have overlays when it comes to maximum debt-to-income ratios. Student loans often have to be manually calculated due to guidelines. Understanding FHA student loan guidelines, conventional student loan guidelines, VA student loan guidelines, and USDA student loan guidelines will prevent any unforeseen circumstances during the mortgage process.