Guidelines For Getting A Mortgage With Student Loans

Even with student loans, it’s possible to qualify for a mortgage if you meet certain requirements, including the maximum debt-to-income (DTI) ratio. Here’s everything you need to know about getting a mortgage when you have student loan debt.

Can you get a mortgage with student loan debt?

Yes, you can have student loans and a mortgage at the same time. Like with any type of loan, your ability to qualify for a home loan depends on your credit score and ability to repay. Simply having student loan debt doesn’t necessarily hurt your credit score.

You also have to dedicate a portion of your monthly income to paying back the student loans, so you’ll need to calculate what mortgage payment you can afford.

How student loans impact your DTI ratio

One of the key factors that lenders look for, and that student loans will impact, is your debt-to-income ratio. Your DTI includes all your debts (which include your student loan payments) versus all your earnings. The ratio is calculated by dividing your monthly debt payments by your monthly gross income, which yields a percentage value that lenders then use to evaluate your ability to repay a mortgage.

Lenders have a general framework for distinguishing a good DTI from one that indicates borrowers may be stretching themselves too thin.

“Maximum DTI ratios are typically set at 43 percent, depending on whether it’s a government-backed loan or not,” says Leslie Tayne, a debt relief attorney in Melville, New York. “That means your monthly debt obligations divided by your monthly income should not exceed 43 percent for best odds of loan approval. Those with higher incomes, lower loan amounts and lower overall debt will have a lower DTI ratio, increasing your odds of loan approval.”

Learn more: How to improve your finances before getting a mortgage

Student loan mortgage DTI example

In each of these scenarios, the borrower wants to get approved for a home loan with a monthly payment of $2,000. The higher the student loan payment, the higher the DTI becomes. To calculate your DTI ratio, add up all your monthly debt payments, divide by your monthly income and multiply by 100.

Times a mortgage lender doesn’t consider your student loan debt

There are some occasions when a mortgage lender will exclude your student loan debt from its formula for determining your DTI, including:

• Medical professional loans: Some lenders offer physician mortgages, which are specifically for borrowers who have taken on debt to complete medical school. While medical school debt can be quite big, the lender offers the flexibility to remove it from DTI calculations to increase a borrower’s odds of approval.
• Student loan debt with a co-signer: If a co-signer — a parent, for example — is repaying your student loans, you may be able to remove the debt from DTI calculations. Rules vary by mortgage type, but in most cases, you’ll need to show that the co-signer has made the past 12 consecutive payments.
• Student loans eligible for forgiveness, cancellation and employment-contingent repayment programs: These unique situations can also let you exclude student loan debt from your DTI ratio, but you’ll need to speak with your lender to make sure you qualify.

How to get a mortgage when you have student loans

Keep in mind your DTI ratio is just one element in the underwriting process, and there are often compensating factors, such as credit score, that lenders use to determine if you qualify for a loan.

If you have student loans and want to improve your chances of being approved for a mortgage, here are some tips:

• Switch to an income-driven repayment plan: “This can help lower your DTI ratio and increase your odds of getting approved,” says Tayne. “It’s a good idea to make this switch at least a year before applying for a mortgage loan.” Keep in mind that this option only applies to federal student loans.
• Shop around: Research the competition and choose a reputable lender who can help you get preapproved. “An experienced loan officer can discuss your student loan situation with you and offer financing programs best structured to meet your budget goals,” says Donny Schulze, a mortgage loan originator at AnnieMac Home Mortgage.
• Add a co-borrower to the loan: “Additional income always helps with qualification,” says Juan Carlos Cruz, founder of Britewater Financial Group, based in Brooklyn, New York. “This is an easy way to reduce your DTI ratio — but be sure your co-borrower has little to no debt and a high credit score.”
• Expand your search: Consider buying a less-expensive or smaller home, or possibly in a more affordable area.
• Wait things out: “Save up for a larger down payment, reduce your debt and allow any negative information on your credit report to age, which can bolster the likelihood of you getting approved,” says Tayne.
• Explore low down payment options: If you’re saddled with a sizable amount of student loan debt, there are low- and no-down-payment options that may be able to help you overcome the hurdle of trying to save while paying off your academic debt.
• Apply for down payment assistance: If it’s your first time buying a home, you may be able to qualify for down payment assistance via your local or state housing authority. In some cases, programs are designed with students in mind, too. For example, recent graduates in Ohio can apply for down payment assistance between 2.5 and 5 percent of the purchase price. As long as they remain in the Buckeye State for at least five years, the money doesn’t have to be repaid.

Mortgage options for homebuyers with student loans

If you have student loans and want a mortgage, there are multiple home loan programs you might qualify for, including:

• Fannie Mae HomeReady loan – A low-down payment option for lower-income borrowers, with cancellable mortgage insurance
• Freddie Mac Home Possible loan – A similar low-down payment option for lower-income borrowers, with the flexibility to apply sweat equity toward the down payment or closing costs
• Freddie Mac HomeOne loan – Another low-down payment option offered by Freddie Mac specifically for first-time homebuyers
• FHA loan – Insured by the Federal Housing Administration (FHA) and requires a down payment of just 3.5 percent
• VA loan – For active-duty service members, veterans and surviving spouses, with no down payment or mortgage insurance required
• USDA loan – For borrowers in predetermined “rural” areas; you can check eligibility through the USDA website

Guidelines for student loans by mortgage type

Whether you’re currently making student loan payments or have a deferral or forbearance plan, mortgage-backers Fannie Mae, Freddie Mac, the Federal Housing Administration, U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) impose DTI ratio guidelines depending on your situation.

If all of your student loan debt has been forgiven, on the other hand, it won’t be accounted for in your DTI ratio, so long as you have documentation to prove it.

Fannie Mae student loan guidelines

If you’re applying for a conventional loan, many of which are conforming loans, meaning they adhere to Fannie Mae standards, your student loan debt is likely to be included in the DTI ratio used by the lender. Specifically, if your credit report lists your monthly student loan payment, your mortgage lender can use the amount in the report in the underwriting process, according to Fannie Mae guidelines.

If your credit report doesn’t include those payments, or shows the incorrect amount, your lender can factor them into your DTI by reviewing your latest student loan statement instead. Your lender can also use your student loan statement if you’re on an income-driven repayment plan.

“The mortgage lender can obtain documentation to verify that your monthly obligations are $0” in the case of income-based repayment, says Tayne.

What happens if your student loans are in forbearance or deferred? Based on Fannie Mae student loans guidelines, your lender can factor either 1 percent of your remaining student loan balance into your DTI, or one payment based on what’s indicated in your student loan repayment terms.

Freddie Mac student loan guidelines

The Freddie Mac guidelines for student loans are similar to Fannie Mae’s, save for one key difference: If your loans are in forbearance or deferred, or your payment is otherwise documented as $0, your lender can factor in just 0.5 percent of your student loan balance to calculate your DTI ratio.

What if you’re close to paying off your student loans? Both Fannie Mae and Freddie Mac guidelines address this. In general, if you have 10 months or less left on your repayment plan, your lender can opt not to include your student loans in the DTI ratio at all. (This is also true for other types of debt, like auto loans.)

This might also be the case if your student loans are set to be fully forgiven. In either scenario, you’ll have to prove this through your student loan statements.

FHA mortgage guidelines for student loans

As is the case with a conventional loan, under the FHA mortgage guidelines for student loans, your student loans will be considered in your debt obligations. Your lender will derive the monthly payment amount from your credit report or student loan statement.

“FHA lenders prefer a 43 percent or lower DTI ratio, but they can be more flexible if you have extra cash reserves and higher credit scores,” says Tayne.

However, if your loans are in forbearance or deferred, or you’re on an income-driven repayment plan, your mortgage lender is required to factor in either: 0.5 percent of the remaining balance of your student loans if your current monthly payment is $0; the monthly payment listed on your credit report; or the actual payment as indicated on your student loan statement.

VA mortgage guidelines for student loans

If you’re an active member of the military, veteran or surviving spouse, you might be thinking about getting a VA loan. With a VA loan, the guidelines for student loans are somewhat different than those for other types of mortgages.

First, VA loan lenders typically look for a DTI ratio of no more than 41 percent. However, VA loans don’t call for including student loan payments in your DTI ratio if those payments are to be deferred at least 12 months after the date your VA loan closes.

On the other hand, if you’re currently making student loan payments or expect to be within 12 months of your closing date, your mortgage lender is required to calculate an estimated payment. This formula is 5 percent of your remaining student loan balance divided by 12 months.

If your student loan payment is actually higher than that, then that’s what needs to be used, according to Schulze. If your student loan payment is lower, “the VA loan lender can use the actual payment — so long as they document the loan terms from your student loan lender,” says Schulze.

USDA mortgage guidelines for student loans

Generally, lenders look for a DTI ratio of 41 percent with a USDA home loan, but it can exceed that in some circumstances. If you’re making fixed monthly payments on your student loans, your mortgage lender will consider what’s on your credit report or student loan statement for your DTI ratio.

If your student loans are deferred, in forbearance or you’re on an income-based repayment plan, however, your lender is required to factor in 0.5 percent of your remaining student loan balance, or whatever the current payment is within your repayment plan.

Should you pay off your student loans before buying a house?

There is no right or wrong answer. Instead, you’ll need to consider your long-term plans, the local housing market and your ability to juggle multiple debt loads. Plenty of people do it, too: According to the National Association of Realtors, 37 percent of first-time homebuyers also have student loan debt. If you’re thinking about joining their ranks, pay close attention to these three key factors.

• Consider your interest rate: If your student loans have a higher interest rate, for example, you might want to focus any extra money toward paying them off.
• Calculate your DTI ratio: If your DTI ratio is too high to qualify for a mortgage, you may need to pay off student loans first. In addition, if you plan to buy a home in a more expensive area, lowering your DTI ratio by paying off your student loans can help you afford more house.
• Evaluate your savings: It may not make sense to pay off your student loans if you do not have enough saved for a home down payment. Having 20 percent saved for a down payment can make your monthly mortgage payments more affordable. It also eliminates the need to pay private mortgage insurance, which will also lower your mortgage payments.

FAQs

• Can you be denied a home loan because of student loans?
  

  Yes, although the specific reason for your denial will not be your student loans. Instead, you may not obtain mortgage loan approval if your student loans make your debt-to-income ratio too high to afford another payment. Lenders may be concerned about your ability to repay a mortgage and could reject your application.

• Can I use a student loan for a down payment on a house?
  

  No, student loan funds are not allowed to be used as down payment funds on a home or for any part of a home purchase.