Since HUD came up with newly updated guidelines on high student loan debts where they will take Fannie Mae’s lead and use 0.50% of the outstanding balance for debt-to-income calculations, it has gotten easier to qualify for FHA loans with high student loan debts.
How Mortgage With High Student Loan Debts Affect Borrowers
All student loan balances will affect borrowers—even borrowers with deferred student loans, IBR payments, and those with future student loan balance forgiveness. High student loan balances will also hurt credit scores due to liability and can affect the Automated Underwriting System findings.
High student loan balances hurt consumers buying a house. This is because many consumers have higher balances than originally borrowed due to accruing interest. The two biggest hurdles affecting borrowers from qualifying for amortgage are high student loanbalances and auto loans.
Average auto loans are $30,000 with a monthly payment of $400. $400 per month is equivalent to an $80,000 loan balance. Borrowers with higher education degrees such as master’s, medical, dental, business, and law degrees normally have student loan balances over six figures. There are instances where many borrowers with higher student loan balances need to go with conventional loans. This is since IBR payments are allowed with conforming loans but not government loans.
Qualifying For a Mortgage With High Student Loan Debts
All student loan debts must be included when underwriters calculate debt-to-income ratios. Every loan program has its guidelines when it comes to how to calculate student loans. There is debt to income ratio caps on government and conventional loans. Here are the maximum debt-to-income ratio caps on government and conforming loans;
- HUD, the parent of FHA, requires a maximum of 46.9% front end and 56.9% back end DTI to get an approve/eligible per Automated Underwriting System
- USDA caps debt-to-income ratios at 29% front end and 41% back end
- VA does not have maximum debt-to-income ratio requirements as long as borrowers have high ample residual income
- Conventional loans’ maximum debt-to-income ratio cap is a 50% debt-to-income ratio.
- There are no front-end debt-to-income ratio requirements on conforming loans.
Homebuyers with zero student loan payments due to deferment can be affected in qualifying for home loans depending on the mortgage program. A mortgage with high student loan debts does not affect front-end debt-to-income ratios. It does affect back-end debt-to-income ratios.
All Student Loans Needs To Be In Good Standing
All federal debts, including student loans, must be in good standing. Those who default on federal student loans cannot get approved for government or conventional loans. Homebuyers in default on their federal student loans cannot qualify for a mortgage until they have rectified the default. Contact the student loan provider and take steps to get it out of default status. Set up a payment plan. Need to make at least three to six monthly payments on time. This blog will cover ways of qualifying for a mortgage with high student loan debts. Adding non-occupant co-borrowers is always an option with FHA and Conventional Loans. Both HUD, Fannie Mae, and Freddie Mac allow multiple non-occupant co-borrowers. Only married spouses are allowed to be co-borrowers with VA loans. USDA does not allow non-occupant co-borrowers.
FHA And USDA Loans With High Student Loan Debts
FHA and USDA have the same student loan lending guidelines. Deferred student loans for over 12 months are no longer exempt from DTI calculations by mortgage underwriters. HUD now accepts IBR student loan payments that are greater than one dollar that report on credit bureaus. 0.50% of the outstanding student loan balance needs to be used as a hypothetical monthly debt and used by underwriters. A second option, which not all lenders will accept, is contacting the student loan provider and requesting the following: Need to use the following verbiage:
- I am applying for a mortgage.
- My lender needs a fully monthly amortized payment over an extended term
- The term is normally 25 years
- If this figure turns out to be under 0.50% of the student loan balance, we can use this figure versus 0.50% of the outstanding student loan balance.
The fully amortized monthly payment needs to be in writing. Again, not all lenders will accept the second option. Gustan Cho Associates are mortgage lenders licensed in 48 states with no overlays on government and conventional loans and will accept the second option.
VA Loans With High Student Loan Debts
The United States Department of Veterans Affairs (VA) will exempt deferred student loans that have been deferred for longer than 12 months. Non-deferred student loans, VA will allow the following:
- Take 5% of the outstanding student loan balance and divide it by 12 months
- This figure will be used as a monthly hypothetical debt of borrowers by mortgage underwriters
VA does not have a minimum credit score requirement nor a maximum debt-to-income ratio cap.
Conventional Mortgage With High Student Loan Debts
Conventional Loans are the mortgage of choice for borrowers with higher student loan balances. Income-Based Repayment (IBR) is accepted with conforming loans as long as it is reported on the credit report. There are many instances where borrowers with student loan balances higher than $100,000 and their IBR payment is $100 or less monthly. Borrowers who need to qualify for a mortgage with high student loan debts can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are mortgage lenders with no overlays on government and conventional loans. We are available evenings, weekends, and holidays seven days a week.
