How Are Student Loans Calculated For Mortgage

Student loans can be a huge burden. If you’re thinking about buying a home and want to know how student loans are calculated for mortgage, this article is for you.

In a nutshell, making the decision to go back to school and get your degree is an investment in yourself that can pay off in the long run. You’ll be able to earn more money and have more opportunities available to you as a result of your education, which means that if you make smart choices with your student loans and manage them properly, they won’t hold you back from achieving all that life has to offer!

But before we get ahead of ourselves—let’s start at the beginning: how are student loans calculated for mortgage?

How Are Student Loans Calculated For Mortgage

Student loan debt is often considered in your DTI ratio, a formula mortgage lenders use to help assess your creditworthiness as a borrower. This ratio is calculated by dividing your monthly debt payments by your monthly gross income, which yields a percentage value that lenders then scrutinize to evaluate your ability to repay a mortgage.

If you have car loan and student loan payments, for instance, a mortgage lender will add those to your proposed mortgage payment, then divide that total by your gross monthly income.

In general, the result shouldn’t exceed 43 percent, but some lenders look for a lower ratio, 36 percent, while others might accept up to 50 percent.

“Maximum DTI ratios are typically set at 43 percent, depending on whether it’s a government-backed loan or not,” explains Leslie Tayne, an 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.”

Guidelines by loan type

Fannie Mae	Monthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, either 1% of balance or one monthly payment
Freddie Mac	Monthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, 0.5% of balance
FHA	Monthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, either 0.5% of balance or one monthly payment
VA	Monthly student loan payment as listed on credit report or student loan statement or 5% of balance divided by 12 months, whichever is higher; if deferred, not included in underwriting
USDA	Monthly student loan payment as listed on credit report or student loan statement; if deferred, in forbearance or on IDR plan, either 0.5% of balance or one monthly payment

Conventional mortgage guidelines for student loans

Every mortgage loan type has guidelines when it comes to student loans and your DTI ratio. If you’re applying for a conventional loan — many of which are conforming loans, which means they adhere to Fannie Mae and Freddie Mac standards — you can expect your student loans to be included in your DTI ratio.

Fannie Mae guidelines

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 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 guidelines

Freddie Mac’s 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.

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 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

FHA loans also have guidelines regarding student loans and DTI ratio. As is the case with a conventional loan, your student loans will be considered in your debt obligations, and 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,” notes 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, surviving spouse or other qualifying borrower, 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 do some math to come up with 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 Donny Schulze, a mortgage banker with Embrace Home Loans in Hauppauge, New York. 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

If you’re considering a USDA home loan and have student loans to repay, there are also guidelines to consider.

Generally, lenders look for a DTI ratio of 41 percent with a USDA 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.

How to get a mortgage when you have student loans

Knowing how your student loans can impact your mortgage options is important, but 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.”
• Shop around 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 Schulze.
• Consider adding a co-borrower to the loan. “Additional income always helps with qualification,” explains 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.”
• Widen your options. 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,” suggests Tayne.

Mortgage options for homebuyers with student loans

If you have student loans, there are multiple mortgage programs you might qualify for.

• 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
• FHA loan – Backed by the Federal Housing Administration (FHA) and requires a down payment of just 3.5 percent
• VA loan – For active-duty and veterans, with no down payment or mortgage insurance required
• USDA loan – For borrowers in so-called “rural” areas; you can check eligibility through the USDA website

fannie mae student loan calculation

Yes, it is possible to qualify for a Fannie Mae Mortgage or refinance if you have student loans.

The challenge is that your lender, specifically the person doing the underwriting of your loan, has to understand the Fannie Mae Student Loan Guidelines.

Unfortunately, there are far too many underwriters who don’t understand those guidelines and instead use a guideline from the FHA (a different kind of loan) and end up denying your loan when they should have approved it.

Why Is It Sometimes Hard To Get A Fannie Mae Mortgage When You Have Student Loans?

Fannie Mae’s underwriting guidelines have changed several times since student loan repayment plans became a problem after June 2015.

You may have already received conflicting information about your home loan options, or how your student loans are calculated when qualifying for a Fannie Mae mortgage. You may have been told about the 1% rule.

It is not uncommon for inexperienced loan officers to use the guidelines of one loan program, like FHA (1% rule), and incorrectly apply them to your conventional loan application.

We’re going to set the record straight today by talking about student loan guidelines when applying for a Fannie Mae conventional mortgage.

The key is what your underwriter considers your required monthly student loan payment to be. If they get it wrong, your loan can be denied because the key number they use to calculate your debt-to-income ratio will be inaccurate. 

It is important that they get it right, following Fannie Mae’s Student Loan Guidelines, NOT the guideline from the FHA, which doesn’t apply to Fannie Mae loans and is more restrictive.

Fannie Mae Student Loan Guidelines

Fannie Mae student loan guidelines fall into two categories, looking at how much you are expected to repay on your student loan each month:

• Are You Currently In A Student Loan Repayment Plan?  (even if the income-based payment is $0)
• Is Your Student Loan Currently in Deferment or Forbearance?

Are You Currently In A Student Loan Repayment Plan?

These guidelines apply if you are currently required to make payments on your student loans (i.e. you are not in deferment or forbearance.

If a monthly student loan payment is reported on the credit report, the underwriter may use that amount for qualifying purposes as long as it accurately reflects your current payment.  If your credit report does not reflect the correct monthly payment, the underwriter may use the monthly payment that is on the student loan documentation (the most recent student loan statement). 

If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the underwriter must determine the qualifying monthly payment using one of the options below.

If you are on an income-driven payment plan, you can provide the underwriter with student loan documentation from your servicer to verify the actual monthly payment is $0. The underwriter may then qualify you with a $0 payment.

Is Your Student Loan Currently Deferred or In Forbearance?

For deferred loans or loans in forbearance, the lender may calculate a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or a fully amortizing payment using the documented loan repayment terms.

Why Do Lenders Get it Wrong?

In our Guide to Qualifying for a Mortgage with Student Loans, you’ll read hundreds of stories from readers of this website about inexperienced loan officers and lenders that get it wrong.

By far, the single biggest mistake that inexperienced loan officers make is using FHA’s 1% rule for all student loans, all the time.

It’s heartbreaking to think that the folks that found us are just a small sample of what is probably a much bigger number of people that believed the loan officer when they said no, giving up on the dream of homeownership or a lower interest rate.

The simple fact of the matter is that there are different rules for qualifying for a mortgage with student loans depending on what kind of loan you’re applying for, and what kind of payment plan you have.

Your qualifying options are often limited to the experience of the loan officer that you’re talking to. So, the next logical question is, how do you avoid having your options limited?

If you called your lender from an online internet ad, TV or radio commercial, then you are more often than not speaking to someone in a call center with little to no actual experience looking up underwriting guidelines.