Student Loan Guidelines for Getting a Mortgage

Key Takeaways

• It is still feasible to apply for a mortgage while repaying student loans. 

• Your debt-to-income ratio is impacted if you have student loans. While some lenders may permit a DTI ratio as high as 50%, you should aim for a ratio of no more than 36%. 

• Depending on your situation, it may be preferable to prioritize repaying student loans before making a home purchase. 

You can still be eligible for a mortgage even with student loans if you fulfil specific requirements, such as the maximum debt-to-income (DTI) ratio. This is how the amount includes student loans. 

Can you get a mortgage with student loan debt? 

It is possible to have a mortgage and student loans simultaneously. Your credit score and repayment capacity are the determining factors for your eligibility for a home loan, just like they are for any other kind.

It's only sometimes that having student loan debt lowers your credit score. Your debt-to-income ratio is one of the most important things lenders consider, and student loans will impact it. A high student loan debt load may increase your debt-to-income ratio (DTI) and complicate loan acquisition.

You must determine what monthly mortgage payment you can afford because you must also set aside a portion of your income to repay your student loans. 

How student loans impact your DTI ratio 

Student loan debt is frequently considered when calculating your DTI ratio, a tool mortgage lenders use to determine your borrower's creditworthiness. Lenders use this ratio, computed as your monthly debt payments divided by your monthly gross income, to assess your ability to repay a mortgage. The result is a percentage value.

A mortgage lender will add any required student loan and auto loan payments to your proposed mortgage payment and divide the total by your gross monthly income. The outcome should generally be at most 43%; however, some lenders may accept up to 50 percent, while others may prefer a lower ratio of 36 percent.

"Depending on whether it's a government-backed loan or not, maximum DTI ratios are typically set at 43 percent," notes Melville, New York's debt relief lawyer Leslie Tayne. For the best chance of getting your loan approved, your monthly debt payments divided by your monthly income should exceed 43% at most. Higher incomes, smaller loan amounts, and less total debt will all result in a lower DTI ratio, increasing your chances of getting approved for a loan. 

How to get a mortgage when you have student loans

Remember that your DTI ratio is only one component of the underwriting process, and lenders frequently use other factors—like your credit score—to assess your eligibility for a loan.

Here are some pointers if you have student loans and want to increase your chances of getting a mortgage approved: 

• A change to an income-driven repayment plan can help you get approved more often by lowering your debt-to-income ratio, according to Tayne. "Making this change at least a year before applying for a mortgage loan is a good idea." 

• Look around. Choose a trustworthy lender that can assist you in getting pre-approved by doing some competition research. Donny Schulze, a mortgage banker with Embrace Home Loans in Hauppauge, New York, says, "An experienced loan officer can discuss your student loan situation with you and offer financing programs best structured to meet your budget goals." 

• Include another borrower on loan: According to Juan Carlos Cruz, the founder of Brooklyn, New York-based Britewater Financial Group, "extra income always helps with qualification." "This is a simple method to lower your debt-to-income ratio, but make sure your co-borrower has excellent credit and little to no debt." 

• Extend your search by purchasing a smaller, less expensive home or one in a more reasonably priced neighbourhood. 

• Wait it out: According to Tayne, "You can increase your chances of being approved by saving up for a larger down payment, reducing your debt, and allowing any negative information on your credit report to age." 

Mortgage options for homebuyers with student loans

There are several home loan programs for which you may be eligible if you have student loans and wish to get a mortgage. These programs include: 

• For lower-income borrowers, the Fannie Mae HomeReady loan offers a low down payment option with cancelable mortgage insurance. 

• A comparable low-down-payment option for borrowers with lower incomes is the Freddie Mac Home Possible loan, which allows borrowers to apply sweat equity towards closing costs or the down payment. 

• Freddie Mac Another low-down-payment option Freddie Mac provides exclusively to first-time homebuyers is the HomeOne loan. 

• FHA loan: protected by the Federal Housing Administration (FHA) and only needs a 3.5% down payment 

• VA loans require no down payment or mortgage insurance and are available to veterans, active-duty service members, and their surviving spouses. 

• USDA loans are available to borrowers who live in designated "rural" areas; visit the USDA website to verify your eligibility.

Guidelines for student loans by mortgage type

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

However, if all of your student loan debt has been discharged, as long as you can substantiate the information, it won't be included in your DTI ratio.

Fannie Mae student loan guidelines

The lender's DTI ratio will likely include your student loan debt if you're applying for a conventional loan—many conforming loans that follow Fannie Mae guidelines. In particular, by Fannie Mae guidelines, your mortgage lender may utilize the amount shown in your credit report during the underwriting process if it contains information about your monthly student loan payment.

Your lender can incorporate those payments into your DTI by reviewing your most recent student loan statement if your credit report excludes them or displays the wrong amount. Your lender may consult your student loan statement if you are enrolled in an income-driven repayment plan.

Regarding income-based repayment, Tayne states, "The mortgage lender can obtain documentation to verify that your monthly obligations are $0."

What occurs if you have deferred or placed your student loans into forbearance? Your lender may include one payment based on what is specified in your student loan repayment terms or 1% of your outstanding student loan balance in your DTI, per Fannie Mae's student loan guidelines.

Guidelines for Freddie Mac Student Loans

With one significant exception, the Freddie Mac guidelines for student loans are similar to those of Fannie Mae: your lender can only include 0.5% of your student loan balance when calculating your debt-to-income ratio if your loans are in forbearance or deferred or if your payment is otherwise documented as $0.

What happens if your student loan debt is almost paid off? Guidelines from Freddie Mac and Fannie Mae both touch on this. Generally speaking, your lender may decide not to include your student loans in the DTI ratio if you have ten months or less left on your repayment plan. (This also applies to other kinds of debt, such as auto loans.)

This may be the case if the complete forgiveness of your student loans is your plan. In either case, you must provide your student loan statements as proof.

FHA mortgage guidelines for student loans 

Your student loans will be included in your debt obligations under the FHA mortgage guidelines for student loans, just like with a conventional loan. Your lender will use your credit report or student loan statement to determine the monthly payment amount.

Tayne says, "FHA lenders prefer a DTI ratio of 43% or less, but they can be more flexible if you have extra cash reserves and higher credit scores."

Nonetheless, your mortgage lender must take into account one of the following if your loans are deferred, in forbearance, or if your repayment plan is income-driven: the monthly payment is shown on your credit report, the actual payment as shown on your student loan statement; or 0.5% of the outstanding balance of your student loans if your current monthly payment is $0.

VA mortgage guidelines for student loans

You may be considering applying for a VA loan if you are a veteran, surviving spouse, or active armed forces member. The requirements for student loans with a VA loan differ slightly from those for other kinds of mortgages.

First, lenders for VA loans usually require a DTI ratio of no more than 41%. However, if student loan payments are to be deferred for at least a year after your VA loan closes, then VA loans do not require you to include those payments in your DTI ratio.

On the other hand, your mortgage lender must determine an approximate payment if you are currently making student loan payments or anticipate doing so within a year of your closing date. This calculation is 5% of the amount you still owe on your student loans divided by 12 months. 

According to Schulze, if your actual student loan payment is more significant than that, then that is what should be applied. According to Schulze, "the VA loan lender can use the actual payment— so long as they document the loan terms from your student loan lender" if your student loan payment is less.

USDA mortgage guidelines for student loans 

A DTI ratio of 41% is typically what lenders look for in a USDA home loan, though it can go higher in certain situations. Your mortgage lender will consider your credit report and student loan statement when calculating your DTI ratio if you make fixed monthly payments on your student loans.

However, your lender must factor in 0.5% of the remaining balance on your student loans or whatever the current payment is within your repayment plan if your loans are deferred, in forbearance, or on an income-based repayment plan.

Is it better to pay off student loans before making a home purchase? 

While it is possible to have a mortgage and student loans simultaneously, there are situations in which it may be wiser to pay off student debt first. For example, if the interest rate on your student loans is higher, you should put all your extra money towards paying them off. Lowering your DTI ratio can also help you afford a larger home if you purchase one in a more expensive neighbourhood.