How Student Loans Affect Mortgage Qualifying

It is no secret or surprise that student loans are becoming a huge burden on new college graduates. For many borrowers, students loans can easily be the largest debt they incur, sometimes exceeding their mortgage. It is becoming common place for me to see borrowers with $100,000 or more in student loan debt.

When it comes to buying a home, student loan debt could make or break a mortgage application so it is important to know how lenders evaluate student loan debt.

The first thing to know is that student loan debts are almost always counted even if the loan is currently in deferment. In other words, even if you aren’t required to make a payment currently, underwriting guidelines require that mortgage lenders still count that debt in your debt ratio calculation by using an estimated payment.

Below is how underwriters typically treat student loans depending on the backer of the mortgage:

Fannie Mae:

If the credit report provides a monthly payment, the lender can use that payment for qualifying. If the credit report does not reflect the correct payment, underwriting can use a statement from student loan provider showing the monthly payment.

If the credit report does not provide a monthly payment because the loan is deferred or in forbearance, then 1% of the balance will be used for qualifying or a fully amortizing loan payment estimate. If the borrower is on an income based repayment (IBR) plan then underwriting can use that payment even if it is zero as long as documentation is provided.

Freddie Mac:

If the credit report provides a monthly payment greater than zero then that payment can be used for qualifying. If the monthly payment reported on credit report is zero, then use .5% of the balance a payment.

Student loans subject to forgiveness, discharge, and employment contingent repayment programs, the payment may be excluded from the monthly debt to income ratio provided the borrower currently meets the requirements for forgiveness, discharge, or employment contingent repayment.

FHA & USDA:

Underwriter must use the GREATER of 1% of outstanding balance or the actual documented payment. The exception to this is if the payment is less than 1% of the outstanding balance and that payment is fully amortizing. Income based repayment plans are not eligible.

VA:

If borrower can provide written evidence that the student loan will be deferred for at least 12 months beyond the closing date, then a monthly payment does not have to be considered.

Otherwise, calculate 5% of the outstanding balance and divide by 12. The higher of the calculation and the payment reported on the credit report. If the borrower cannot qualify with the higher payment, then statement from student loan servicer must be provided with the actual terms of student loan.

Jumbo / Portfolio:

Most jumbo / portfolio lenders will use 1% of the outstanding balance or the actual documented payment that is fully amortizing. Payment deferrals and income based repayment plans are typically not allowed.

The one exception to this rule is medical doctors. There are “Doctor’s mortgages” where student loans can be excluded. The borrower must be a medical doctor. These are useful typically when a medical doctor is in residency and the student loans are deferred due to the low resident salaries.