qualifying for a mortgage with student loansIf you are in the market for buying a house it is important to understand the implications of qualifying for a mortgage with student loans. Each year, at least 60% of college attendees take out some form of student loans to help with the ever growing costs of higher education.  While this can be an invaluable investment into one’s future, these loans can pose a challenge when it comes to buying a home.  Recently, new guideline changes have gone into effect that can substantially impact how someone qualifies for a mortgage.

FHA home loans are a great choice for first time home buyers with flexible work history and credit requirements!

The main way student loans impact an individual’s qualification is through their impact on an applicant’s Debt-to-Income Ratio (DTI).  This ratio gives a lender an idea of an applicant’s ability to reliably make monthly payments.  Simply put, this figure is calculated by dividing all monthly debt obligations (ex. Car Loans, Credit Cards, Mortgages, Student Loans, etc.) by gross monthly income.

Each mortgage program has different guidelines that are key to qualifying for a home loan with open student loan debts.  Calculating the monthly costs for student loans is especially tricky if the loans are deferred, in forbearance or not yet in repayment.

Regardless of program type, one of the most important actions a prospective home buyer much can take is to gather the payment documentation for the student loans.  This will allow your mortgage professional to ensure the most accurate qualification and best deal possible. The buyer’s credit report may not always accurately reflect the buyer’s minimum student loan payments which may affect underwriting approval.

Below are a few indicators of how student loan payments will affect a buyer’s debt to income ratio when qualifying for a home loan:

  • Conventional Mortgage with Student Loans
    • Regardless of deferment or forbearance, a payment must be counted against DTI
    • This payment will be calculated by either 1% of the remaining balance or the actual monthly payment, whichever is higher.
    • If a student loan payment is reporting on a credit report some conventional programs may allow this payment to be used even if it is under 1%.
    • Example: $24,000 in total student loans would add a minimum of $240 per month for qualifying purposes.
  • FHA Mortgage with Student Loans
    • Regardless of deferment or forbearance, a payment must be counted against DTI
    • The greater of the actual monthly payment from the credit report or 1% of the remaining balance will be used to calculate a minimum qualifying payment.
    • Income based repayment plans are no longer accepted if they are not fully amortizing.
    • Example: $24,000 in total student loans would add $240 per month for qualifying purposes if no payment is reporting on credit otherwise the underwriter will accept documentation showing the minimum student loan payments.
  • USDA Mortgage with Student Loans
    • Regardless of deferment or forbearance, a payment must be counted against DTI
    • This payment will be calculated by either 1% of the remaining balance or the actual fixed monthly payment, whichever is higher.
    • Income Based Repayment plans are not acceptable if they are less than 1% of the balance.
    • Example: $24,000 in total student loan payment would add a minimum of $240 per month for qualifying purposes.
  • VA Mortgage with Student Loans
    • The actual payment listed on the credit report or account statement will be counted against a borrower’s DTI.
    • Student loan debt may be excluded from DTI if the payment is not scheduled to begin for 12 months after the closing date (Documentation is crucial).

Get Pre-Approved to buy a home when you have student loans

We work with several first time home buyers and even repeat buyers have student loan debt.  It is crucial that you work with an experienced loan officer that knows the guidelines to assist you in qualifying for a mortgage when you have student loans.  With each mortgage program having different loan requirements it is important to understand how your debt to income is affected with each home loan option.

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