How Student Loans Affect Qualifying For Mortgage

This article is about how student loans affect qualifying for mortgage. Two types of debts are the biggest hurdles most home buyers will encounter when qualifying for a mortgage loan. They are student loan debts and automobile monthly payments. Student loan debts can be tens of thousands of dollars. A car payment can be a minimum of $400 per month. Some folks have student loan debts of over $100,000. Many home buyers who have advanced degrees can have student debts of more than $200,000. Car payments are amortized over a short period of time such as three to five years. So car loan payments can be substantial when it comes to debt to income ratio calculations. A $400 monthly car payment is equivalent to a $80,000 mortgage loan. Borrowers intending in applying for a mortgage, try to avoid in getting a car loan. A car loan will affect debt to income ratios when qualifying for a mortgage. There has been changes with student loans and DTI Calculations. Deferred student loans that many homebuyers question how student loans affect qualifying for mortgage. In the following paragraphs, we will cover how student loans affect qualifying for mortgage.

How Student Loans Affect Qualifying For Mortgage on FHA Loans

Lately, I have been getting more and more inquiries from home buyers who could not qualify for a mortgage from other lenders due to their high student loan debt. Not too long ago, HUD exempted student loans that were deferred for at least 12 months from the closing date from debt to income ratio calculations of borrowers. Unfortunately, this is no longer the case. All student loans on FHA and Conventional loans needs to be counted in the borrower’s debt to income ratio calculations. This holds true even though the student loans have been deferred. VA exempts deferred student loans that is deferred for longer than 12 months.

How Student Loans Affect Qualifying For Mortgage With Recent Changes on HUD

The reason HUD, the parent of the Federal Housing Administration or FHA, has changed this policy on student loan guidelines: Changes was made to make sure that a borrower with high student loan balances are able to pay their mortgage payments timely. Once the deferment period is over and after their deferred student loans become due after their deferment period is over, HUD wants to make sure that a new mortgage payment will not cause financial strain. After the changes of no longer exempting deferred student loans, borrowers who got hurt the most were those with higher student loan debts such as the following professionals:

• doctors
• dentists
• nurses
• attorneys
• professors
• borrowers who went to expensive private colleges and universities where their student loan balances exceeded more than $200,000

This new rule with borrowers not being able to exempt their deferred student loan debt will disqualify many home buyers with large student loan debts. However, on the positive side, it will force home buyers who have large student loan debts from taking on more debt than they can handle once their student loans become due and is out of deferment.

How Student Loans Affect Qualifying For Mortgage; HUD Student Loan Guidelines

Here are some bullet points on How Student Loans Affect Qualifying For Mortgage With FHA Loans: Deferred student loans are no longer exempt from debt to income calculations. Zero payment income base repayment plans is now available on FHA loans. Borrowers can either opt to use an IBR payment or the lender will use 0.50% of the outstanding student loan balance. Or the mortgage lender can use a hypothetical fully amortized repayment monthly student loan plan on an extended term. That amount needs to be in writing by the student loan provider.

The loan officer can be on the phone with student loan provider via conference call. Loan officer can talk to the student loan customer service representative that you are applying for a mortgage.

Borrowers without an IBR payment and need a lower amount than the 0.50% of the outstanding student loan balance can see if getting a set dollar amount that will be a hypothetical monthly student loan payment. But that payment needs to be fully amortized over an extended-term which is normally 25 to 30 years. The longer the extended term, the lower the student loan payments will be. Loan officer can use the verbal figure to start processing FHA loan. However, a written agreement or coupon needs to be provided by the student loan provider. Graduated payment plans are not allowed. Many borrowers have difficulty with getting what is required. The loan officer should be on the phone with you with student loan provider. Loan officer can get the exact information needed to proceed with Mortgage Loan Process.

How Student Loans Affect Qualifying For Mortgage: Student Loans In Default

You cannot qualify for a government home mortgage if you have defaulted on your federal student loan unless you go through a rehabilitation student loan program. If you have your wages garnished and have been making monthly student loan payments for a long time, you still cannot qualify for a government loan unless you have gone through the rehabilitation program. Consumers who are in default of their federal student loans can contact their student loan program and request that they want to get their student loans out of default. The student loan provider will set up a trial payment program for 9 months. Once you have completed timely payments through the rehabilitation program, your student loan is no longer in default. Caivrs will be cleared and will now be eligible for any type of government loans. There is a form you need to fill out. Without you completing this rehabilitation form completed, your default status will not be removed.

How Student Loans Affect Qualifying For Mortgage On Conventional Loans

Both Fannie Mae and Freddie Mac never had an exemption rule when it came to deferred student loans. Conventional Loans allows Income-Based Repayment as long as the IBR reports on all three credit bureaus. No matter how long a student loan is deferred, Fannie Mae and Freddie Mac required a fully amortized monthly minimum student loan payment amount in writing by the student loan provider. In the event if the student loan provider could not provide a written minimum monthly student payment amount, then 1.0% of the outstanding student loan balance is used in lieu of the monthly student loan payment provided by the student loan provider.

How Student Loans Affect Qualifying For Mortgage: Case Scenario

For example, here is a case scenario: if the home buyer who is qualifying for a Conventional Loan has a $200,000 student loan balance in deferment and if that borrower cannot get a written extended amortized monthly payment. then 0.50% of the $200,000 or $1,000 will be used as the borrower’s monthly debt when calculating the borrower’s debt to income ratio. If the IBR payment is $50 dollars per month and is reported on all three credit bureaus, we can use the $50 dollar payment to calculate DTI. The large outstanding balance does not matter as long as the IBR payments report on credit bureaus. The student loan monthly payment can be an Income Base Repayment: The IBR does not need to be fully amortized. This monthly IBR monthly student loan payment plan needs to be in writing by the student loan provider.

How Student Loans Affect Qualifying For Mortgage on VA Loans

VA loans is by far the best owner occupant home loan program where a borrower with a VA Certificate Of Eligibility can qualify for a home loan with no money down and no mortgage insurance required. VA Loans also allow for up to a 4% in seller concessions. Homebuyers who can qualify for a VA Loan will not need a single penny out of pocket and purchase a home with no closing costs and no down payment. Unfortunately, not everyone can qualify for a VA Loan. Need to have served in the United States Armed Services. Need to have been granted an honorable discharge. Need to have been issued a VA Certificate Of Eligibility, or COE, from the Department of Veterans Affairs. One of the greatest benefits with serving our country is being eligible for a VA loan. Deferred student loans longer than 12 months is exempt from debt to income ratio calculations.

How Student Loans Affect Qualifying For Mortgage: VA Guidelines on Non-Deferred Student Loans

With non-deferred outstanding student loans, here is how VA requires lenders to calculate monthly payments:

• Take 5% of the outstanding student loan balance
• Divide that by 12
• The resulting figure will be the hypothetical monthly payments used on VA Loans

How Student Loans Affect Qualifying For Mortgage On VA Loans

Here are some bullet points on VA Loans:

• Mandatory waiting period after a foreclosure, deed in lieu of foreclosure is 2 years from the recorded date of foreclosure and/or date of the sheriff’s sale
• FHA requires a three year waiting period after a foreclosure and deed in lieu of foreclosure
• Fannie Mae and Freddie Mac require a four year waiting period to qualify for a Conventional Loan after a deed in lieu of foreclosure
• The waiting period is seven years to qualify for a Conventional loan after the recorded date of a foreclosure
• There is a two year waiting period to qualify for a VA Loan after a bankruptcy
• FHA requires a two year waiting period and Fannie Mae and Freddie Mac requires a four year waiting period after a Chapter 7 bankruptcy discharged date to qualify for a Conventional Loan
• There is a two year waiting period to qualify for a VA loan to qualify after a short sale date.
• The waiting period clock starts from the date of the short sale that is reflected on the HUD Settlement Statement
• HUD requires a three year waiting period to qualify for a FHA Loan after the short sale date.
• There is a four year waiting period to qualify for a Conventional loan after the date of the short sale
• VA loans due exempt deferred student loan payments unlike FHA Loans and Conventional loans
• Student loans that has been deferred at least 12 months are exempt from debt to income ratio calculations.

Many lenders may have lender overlays when it comes to exemption on deferred student loans on VA loans.

How Student Loans Affect Qualifying For Mortgage With USDA Loans

The United States Department of Agriculture is the governmental agency that is in charge of USDA Loans. Student Loan Guidelines on USDA Loans is exactly the same as FHA: USDA Loans is not for everyone. The location of the property needs to be classified as an eligible USDA approved area and the borrower needs to also qualify for the USDA Loan. The U.S. Department of Agriculture does not exempt deferred student loans. Borrowers with deferred student loans needs to get a fully amortized extended-term monthly payment statement from their student loan provider. Or 0.50% of the borrower’s outstanding student loan balance will be used when calculating the borrower’s debt to income ratios.

How Student Loans Affect Qualifying For Mortgage: Borrowers With High Debt To Income Ratios Due To Student Loans

Gustan Cho Associates Mortgage Group specializes in helping borrowers with higher debt to income ratios due to student loans. Our team of loan officers at Gustan Cho Associates will find creative ways of getting borrowers into a loan program. This holds true even with high student loan balances. There are many loan programs such as Non-QM Mortgages that Gustan Cho Associates offers its borrowers. Deferred student loans are exempt from debt to income ratio calculations on non-QM loans. The Team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. Contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.

FAQ on How Student Loans Affect Qualifying For Mortgage

FAQ Regarding How Student Loans Affect Qualifying for a Mortgage:

Do student loans affect my ability to get a mortgage, and if so, how?

Indeed, student loans affect your capacity to get a mortgage, mostly through your debt-to-income (DTI) ratio, credit score, and payment history. For DTI, lenders analyze these factors to decide if you can handle a mortgage payment alongside your student loan burden and debt.

How does my debt-to-income (DTI) ratio affect mortgage approval?

• Your DTI ratio is the percentage of your gross monthly income that goes towards debt payments such as loans, credit card bills, etc.
• Most financiers do not accept a DTI ratio higher than 43%, but will permit higher ratios assuming there are compensating factors.
• If your student loan payments are high, they can raise your DTI, which decreases the amount of mortgage loan you qualify for.

How do lenders calculate student loan payments for mortgage qualification?

• Different mortgage types may lead to different methods used by lenders to ascertain student loan payments.
• FHA Loans: With these loans, if your student loans are in deferment, lenders will take 0.5% of the loan balance as the monthly payment.
• Conventional Loans (Fannie Mae & Freddie Mac): These use the actual monthly payment if it is on the credit report. Otherwise, they use 1% of the loan balance if there is no payment listed.
• VA loans: Student loans may be excluded from the DTI calculation if they have been deferred for a minimum of 12 months.
• USDA loans: Use 0.5% of the loan balance, or the actual payment, if the loan is fully amortizing.

Does student loan deferment or forbearance affect mortgage approval?

Yes, it does. Even in deferment or forbearance, lenders mostly include the assumed payment in the DTI ratio, which could affect your ability to get a mortgage.

Can I qualify for a loan when I am on an income driven repayment (IDR) plan?

• Yes, but that depends on the lender and what type of loan you have:
• Some lenders accept an IDR payment if you have it on your credit report.
• Some lenders may calculate a higher estimated payment like 1% of the balance, which is less favorable for your DTI.

Will student loans have an impact on my ability to get a mortgage because of my credit score?

Yes. Your credit score can be impacted by a number of things, including:

• Payment history. Late student loan payments can reduce your score.
• Credit utilization. Student loan balances are treated as installment debt, which is good for your credit mix.
• Credit age. Older student loans help maintain a favorable credit history.

Does having delinquent student loans impact my ability to get a mortgage?

• FHA loans: Defaults on federal student loans might disqualify you unless you do loan rehabilitation or consolidation.
• Conventional loans: Most lenders expect student loan payments to be in good standing.
• VA loans: Delinquent student loans may require a satisfactory repayment plan to be put in place prior to getting approved.

With student loans, what can I do to become eligible for a mortgage?

• Lower your DTI: Increase your income or pay down other debt.
• Improve your credit score: Pay bills on time and avoid incurring new debts.
• Pick the appropriate loan program: Check the guidelines for FHA, VA, USDA, and conventional loans.
• Add a co-borrower: Adding a co-borrower with a strong credit profile helps.
• First-time homebuyer programs: These assist with down payments and closing costs.

Am I able to qualify for a mortgage if I have a student loan and intend to apply for forgiveness?

Yes. Qualifying for student loans forgiveness means your DTI could improve, making it easier to get a mortgage. Albeit, lenders will include your estimated monthly payment in calculations until the loan is officially forgiven.

Is it necessary to clear off my student loans before getting a mortgage?

Not really. If paying down student loans reduces your DTI and improves your credit score, it can be helpful. However, having a certain amount of installment debt can also be beneficial for demonstrating credit management skills. Student loans are very important when it comes to qualifying for a mortgage since they impact your DTI ratio, credit score, and overall qualification. Knowing lender requirements and smartly managing your debt can help you deal with the mortgage process easily. Speak with a loan professional to get expert guidance on the best options available for achieving homeownership in your case.

This BLOG on how student loans affect qualifying for mortgage was UPDATED on February 10th, 2025.