Student Loans Mortgage Guidelines on Home Loans

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In this blog, we will cover and discuss the student loans mortgage guidelines on government and conforming loans. We will cover and fully go into depth about qualifying for a mortgage with large outstanding student loans. There have been major updates on student loans mortgage guidelines on FHA and conventional loans. Higher student loan balances are one of the biggest hurdles when it comes to qualifying for a mortgage.

Deferred student loans that have been deferred longer than 12 months are no longer exempt with the exception of VA loans. One of the biggest hurdles for homebuyers with large outstanding bills is qualifying for a mortgage. Student loans are the biggest hurdles for homebuyers who have student loans in deferment. In ths following paragraphs, we will cover in depth the student loans mortgage guidelines on government and conventional loans.

Are Student Loans Included In Debt-To-Income Ratio For a Mortgage?

A hypothetical monthly debt needs to be counted when mortgage underwriters calculate the debt to income ratios of the borrower. Income-Based Repayment plans are only allowed on conventional loans. This holds true even if the IBR payment is a zero monthly payment. Many borrowers with large student loan balances and on income-based repayment plans may need to go with conventional loans since FHA loans do not accept IBR payments.

Gustan Cho Associates are experts in working with homebuyers with large outstanding student loans. The team at Gustan Cho Associates can structure your mortgage loan application and put you in a home mortgage program where you meet the agency mortgage guidelines with large outstanding student loans.

Can I Get a Mortgage With Large Outstanding Student Loans

Many home buyers with graduate and/or professional degrees have student loan balances into the six figures. Student Loans Mortgage Guidelines On Government & Conforming loans depend on the particular loan program. Recent changes on Student Loans Mortgage Guidelines On Conventional Loans allow Income Based Repayment Plans also referred to as IBR. Conventional loans are no longer the only home mortgage program that accepts income-based repayments. FHA now allows income-based repayment plans on deferred student loans.

VA Deferred Student Loan Guidelines on VA Loans

With the exception of VA loans, deferred student loans that are deferred for longer than 12 months are no longer exempt from debt to income ratio calculations on all home mortgage programs. VA loans have one of the most lenient student loan guidelines out of any home loan program. 

Mortgage Guidelines on Income-Based Repayment Student Loans

This also holds true with a zero income-based repayment plan. Borrowers with a large outstanding student loan balance with a zero monthly IBR payment can qualify for conventional and FHA loans. FHA and Conventional loans allow income-based repayment plans with zero monthly payments. You can have the zero IBR payment count as their monthly student loan debt when the mortgage underwriter calculates the borrower’s debt to income ratios. Borrowers with a substantial student loan balance and on an IBR can now qualify for conventional and FHA loans where they were not able to qualify before.

FHA and Conventional Loans Student Loan Payment Calculations By Mortgage Underwriters

Let’s take a case study on how mortgage underwriters calculate Income-Based Repayment Plans. For example, a borrower who has a $200,000 student loan balance with an Income Based Repayment (IBR) of $80 per month can use the $80 per month on Conventional and FHA loans. 

The $80 IBR payment will be used as their monthly student loan debt instead of the 0.50% of the outstanding balance. If the IBR payment was $0 dollars per month, then HUD and Fannie Mae, and/or Freddie Mac Agency Guidelines will allow you to use the zero monthly payment IBR plan on conventional loans. The IBR payment needs to report on the credit report.

FHA and Conventional Student Loan Guidelines on Deferred Student Loans

If the borrower has a large outstanding student loan balance such as $200,000 in deferment, then 0.50% of the outstanding balance will be used or $1,000 per month as the hypothetical debt for debt to income ratio calculations. This formula also applies to USDA loans. If the borrower can get an Income-Based Repayment dollar amount, the lender can use the IBR payment versus the 0.50% of the student loan balance. Prior to the newly updated student loan guidelines from Fannie Mae and HUD, 1.0% versus 0.50% was used on conventional and FHA loans.

How Student Loans Affect Debt To Income Ratios

FHA Student Mortgage Guidelines

FHA Loans is the nation’s most popular mortgage loan program. Borrowers can get an approve/eligible per Automated Underwriting System approval on an FHA loan with a max of 46.9% front end and 56.9% back end DTI. Conventional loan’s max debt to income ratio cap is 50%. There is no front-end debt to income ratio on conventional loans. USDA caps it at 29% front end and 41% back end. The U.S. Department of Veterans Affairs (VA) does not have a maximum debt-to-income ratio cap. This holds true as long as the borrower can get an approve/eligible per automated underwriting system (AUS).

HUD Deferred Student Loan Mortgage Guidelines

HUD now allows IBR payments on FHA loans even if the borrower has zero monthly payment reporting on the credit bureaus. 0.50% of the outstanding deferred student loans balance will be used on outstanding deferred student loans. HUD and no other home mortgage loan program, with the exception of VA loans, exempt deferred student loans that have been deferred for longer than 12 months on FHA loans. VA loans are the only mortgage loan program that exempts deferred student loans that have been deferred for longer than 12 months. 

How Mortgage Underwriters Calculate Student Loans

Here is how mortgage underwriters need to calculate student loans on FHA loans. Mortgage Underwriters need to include all student loan balances in the borrowers’ liability section. This is regardless of the type of payment. Whether or not the student loans are deferred or on an Income-Based Repayment Plan (IBR).

Using Proposed Fully Amortized Student Loan Payment Versus 0.50% of the Student Loan Balance

There are cases where the fully amortized monthly student loan payment can be lower than 0.50% of the outstanding student loan balance. In the event and case where the student loan monthly debt payment is less than 0.50% of the outstanding balance reporting on credit bureaus the lender needs to receive the following documentation:

  • A written statement showing the monthly student loan payment is fully amortized over an extended term
  • The actual monthly student loan payment, the status of the student loan payment, and the outstanding balance and term from the student loan provider

The lender needs to use either of the following:

  • 0.50% of the outstanding student loan balance as the borrower’s monthly student loan debt
  • The documented monthly payment is fully amortized on an extended term which is normally 25 years

The fully amortized hypothetical monthly payment over an extended term needs to be in writing by the student loan provider.

How To Get A Fully Amortized Monthly Student Loan Payment Over An Extended Amortized Term
How To Get A Fully Amortized Monthly Student Loan Payment

Student loans mortgage guidelines on using the proposed hypothetical amortized payment may get you a lower payment number than using the 0.50% of the student loan outstanding balance. Borrowers who want to use a fully amortized hypothetical monthly payment over an extended term need to contact the student loan provider and request this in writing. If you feel more comfortable having your loan officer on the phone with you when calling the student loan provider, you can have the loan officer on a three-way conference call. When contacting the student loan provider to get a fully amortized monthly payment over an extended term in writing, use the following verbiage:

  • I am applying for a home mortgage loan
  • My lender needs a fully monthly amortized payment over an extended term which is normally 25 years
  • This hypothetical amount turns out to be around 0.50% versus the 1.0%
  • Need this in writing by the student loan provider

Mortgage underwriters can use the fully amortized monthly mortgage payment over an extended term instead of the 1.0% of the outstanding student loan balance. Again, this statement needs to be in writing by the student loan provider.

Mortgage Guidelines On USDA Loans

USDA Loans has the same student loan mortgage guidelines as FHA loans. Any fixed payment of student loans can be used as monthly debt in DTI calculations. Lender needs verification and documentation that the loan is permanently amortized with a fixed payment, including interest rates being fixed and the repayment plan being fixed on FHA, VA, and USDA loans Income Based Repayment Plans, Graduated Adjustable, and other non-fixed repayment plans including deferred student loans cannot be used in debt to income ratio calculations on FHA, VA, and USDA loans. However, Fannie Mae and Freddie Mac allow IBR payments on conventional loans. This holds true even with zero IBR payments. Lenders must include the payment as follows:

  • A permanent amortized, fixed payment may be used in the debt ratio when the lender retains documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed
  • Like FHA Loans, 1.0% of the outstanding loan balance needs to be used as a hypothetical monthly student loan payment

VA Student Loan Guidelines on VA Home Loans
Mortgage Guidelines On VA Home Loans

Per VA student Loans Mortgage Guidelines, deferred student loans that have been deferred for at least 12 months are exempt from debt-to-income ratio calculations. VA loans are the only home mortgage loan program that exempts deferred student loans that have been deferred for longer than 12 months. Mortgage underwriters can use monthly payments on borrowers’ credit reports as long as they are fully amortized. If the payments are not fully amortized over an extended term, then here is the way how to calculate monthly student loan payments on VA Mortgages:

  • Taking 5.0% of the outstanding balance of student loan
  • Then divide it by 12 months
  • The resulting figure is the monthly student debt used in borrowers’ debt to income ratio calculations for VA loans
  • Or the monthly payment that is reported on borrowers’ credit report

VA student loans mortgage guidlines are very lenient due to being able to exempt deferred student loans deferred longer than 12 months.

HUD and Fannie Mae Student Loans Mortgage Guidelines

The best home mortgage loan program for borrowers with very high outstanding student loans are FHA and conforming loans. The reason being is that conventional and FHA loans are the only loan program that allows Income Based Repayments (IBR). Many borrowers with student loan balances over $100,000 have IBR payments of less than $100 per month. The $100 per month can be used in lieu of the 0.50% of the outstanding student loan balance as the monthly student loan debt when mortgage underwriters are calculating debt to income ratios.

Home Buyers who need to qualify for a mortgage with high student loan balances with a national mortgage company with no lender overlays on government and conventional and FHA loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response.  Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.

This article on Student Loans Mortgage Guidelines was updated on July 24th, 2022