Buying a Home with Student Loan Debt

In a few short months, thousands of college students across the country will walk across a stage, shake a hand, and graduate from a university with a degree and more than likely… a whole lot of debt. Student loans are often necessary to reach your educational goals, but will they affect your ability to qualify for other financing in the future? Here’s what you’ll need to know.

Qualifying for a Mortgage with Student Loan Debt

How your student loans will affect your ability to qualify for a mortgage depends on two things: the total amount you owe, and what type of home loan program you are applying for. There are many loan programs available today and they each treat student debt differently, by the way they calculate your monthly payment.

FHA & USDA Mortgages and Student Loan Debt

Effective last summer, the FHA and USDA began calculating monthly student loan payments at 1% of the total amount owed. Regardless of deferment or income-based repayment plans, 1% of the total must be used to calculate a borrower’s debt-to-income ratio (DTI).  If a borrower is on a standard repayment plan, and their monthly payment is greater than 1% of the total amount owed, the actual payment amount will be used.

For example, lets say John has $65,000 in total student loan debt, but he is in deferment for 6 months. His monthly payment will be calculated as $65,000 * 1% (.01) = $650 regardless of what he actually pays each month.  If, however, he is on a standard repayment schedule and his monthly payment is $780 per month, his payment must be qualified at $780.

VA Mortgages and Student Loan Debt

Last month, the Department of Veterans Affairs (VA) introduced a new policy regarding how student loan debt is calculated. Prior to this change, it was calculated the same way as FHA and USDA. Now, however, the payment is calculated based on 5% of the total student loan debt, divided by 12 months.

Lets get back to John. In this scenario, John’s payment will be calculated as $65,000 * 5% (.05) / 12 = $271. Under the VA mortgage program, John more easily qualifies, because his DTI is lower.

What if John’s student loans are in deferment? If his repayment is scheduled to begin within 12 months from the estimated closing date, 5% / 12 months calculation must be used. If not, however, the payment can be omitted altogether if written evidence can be provided as such.

Conventional Mortgages and Student Loan Debt

Under Fannie Mae Conventional guidelines, student loan payments are calculated under the same rules as FHA and USDA. Under Freddie Mac Conventional guidelines, however, an IBR payment can be used in place of the calculated amount.

Lets say John is on an income-based repayment structure and only pays $250 per month. John will simply need to provide a statement from his loan servicer showing the actual repayment terms.

Perhaps the best news yet is that our 1% Down Conventional program allows for an actual IBR payment to be used when qualifying a borrower. So, not only can John more easily qualify with a lower DTI, but he can put just 1% down on his home purchase!

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To apply for a Mortgage, call Riverbank Finance today at 1-800-555-2098.

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