So you’re thinking of buying a house, but you have student loan debt.
You’re not sure if it’s possible, or if it’s a good idea. Don’t worry, you’re not alone. A lot of people are in the same boat. In this post, we’ll explore some options for buying a house with student loans, even if you owe $100,000 or more!
Student loans and your debt to income ratio
This is the percentage of your monthly income that goes towards paying down debts, and it’s an important factor in determining whether or not you’ll be approved for a loan.
If your DTI is too high, you may need to work on paying down some of your debts before you can qualify for a mortgage. Having student loan additionally with other debts will make it even more difficult to qualify for a mortgage.
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Calculating your debt to income ratio
To calculate it your front end debt to income, divide your total debt’s monthly payment reported on your credit report by your monthly gross income. This will give you a percentage that tells you how much of your income goes towards debt payments each month.
For example, if you the following liabilities:
- Credit card payments: $150/month
- Auto Loan: $500/month
- Personal loan payment: $60/month
Total debt: $710/month
And if your gross monthly income is $6,000. Then your debt to income would be 11.8%.
Now adding an estimated mortgage payment of $1,500, your back-end or housing debt to income ratio would be 36.83%.
OK now let’s talk about buying a house with student loans through the most popular mortgage programs:
Buying a house with student loans with a conventional loan
Mortgage guidelines for conventional loans are issued by Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that buy mortgages from lenders.
According to Fannie Mae and Freddie Mac, the lender must use the payment that reports on the borrower’s credit score so as long as the payment is fully-amortized over a period of at most 20 years.
For borrowers who are on income-repayment programs like IBR or PAYE, Fannie Mae requires the lender to use a “standardized” monthly payment of 1% of the borrower’s loan balance. This standardized monthly payment is used regardless of the actual monthly payment that is being made by the borrower.
For example, if you owe $100,000 in student loan debt, then the lender would calculate the monthly payment at $1,000 and add it to the debt-to-income ratio.
Freddie Mac conventional loans, the calculation is a little bit more different.
The lender can calculate 0.5% of the borrower’s loan balance and assume it as the monthly payment. Because this calculation is lower, it may give the borrower a better chance of qualifying for a bigger loan than with a conventional loan issued by Fannie Mae.
How to qualify for a house with student loans for a conventional loan when you are on deferment or forbearance?
For conventional loans, if the borrower is on deferment or forbearance, the lender must assume that there is a payment in place. In this case, the lender would calculate the minimum payment in the same way as originally stated.
For Fannie Mae conventional loans, the lender would calculate a 1% of the balance. Meanwhile, the calculation for Freddie Mac is 0.5% of the balance of the loan.
Buying a house with student loans with an FHA loan
FHA Loans are insured by the Federal Housing Administration, making it a heavily subsidized government program. FHA insures the loan so that if the borrower defaults on the mortgage, it will pay the lender back a portion of what is owed.
According to FHA, for outstanding Student Loans, regardless of payment status, the Lender must use:
- The payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero; or
- 0.5 of the outstanding student loan balance , when the payment amount is zero
What if you are on a student loan income repayment program with FHA?
If the borrower is on an Income-Driven Repayment (IDR) plan or making payments based on their income, FHA and the amount on your credit report is more than $0, we can use the amount shown on the credit report.
Buying a house with student loans with a VA loan
VA Loans are available only to veterans, active duty military personnel, and certain other groups.
These loans are guaranteed by the Department of Veterans Affairs and they offer a number of benefits, including no down payment and no monthly mortgage insurance.
Guidelines for VA loans are much more flexible than most other mortgage programs.
First, if the Veteran provides written evidence that the student loan debt will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered.
VA guidelines when the student is scheduled to begin payments within 12 months of closing.
According to the VA handbook, If a student loan is in repayment or scheduled to begin within 12 months from the date of VA loan closing, the lender must consider the anticipated monthly obligation in the loan analysis and utilize the expected payment anticipated based on documentation, or;
Calculate each loan at a rate of 5 percent of the outstanding balance divided by 12 months (example: $25,000 student loan balance x 5% = $1,250 divided by 12 months = $104.17 per month is the monthly payment for debt ratio purposes).
Buying a house with student loans with USDA
The United States Department of Agriculture (USDA) offers a mortgage program that helps low- to moderate-income families finance the purchase of homes in rural areas.
The program is available to borrowers with a credit score as low as 640 and there is no down payment required.
Recommendations for student loan debt with USDA loans is very straight forward.
Fixed payment loans: 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.
The fixed payment will fully amortize/pay in full the debt at the end of the term.
Non-Fixed payment loans: Payments for deferred loans, Income Based Repayment (IBR), Income Contingent (IC), Graduated, Adjustable, and other types of repayment agreements which are not fixed must use:
- The current documented payment under the approved repayment plan with the creditor, when the payment amount is above zero; or
- One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, when the payment amount is zero.
The Nitty Gritty
Conventional loans, USDA, FHA, and VA loans all have different rules when it comes to using student loan debt in the mortgage application process. It is important to understand these rules so that you can get the best deal on your home purchase.
Remember that you can always better your chances of buying a house with student loans when you have great credit scores and a good amount in cash reserves. Also, when you minimize the amount of other unsecured debt such as credit cards, and other loans.
Andes Mortgage LLC is an Atlanta-based mortgage broker that is well versed in these guidelines can help you understand exactly how much house you can afford with your income and student loan debt.
If you would like to learn more about this or other mortgage topics, please call us at 770-740-4050 and speak to one of Mortgage Specialists.
Start your home purchase journey
Get answers to your questions and save thousands on your home loan by comparing different programs and interest rates.
