Does Student Loan Debt Affect Mortgage Applications?

If you pay off student loans, you won’t be the first to ask, “Can I get a mortgage with student loans?” Nationwide, 29% of people with student loan debt say their student loans have delayed purchasing their home, according to a 2021 report from the National Association of Realtors.

First, the bad news: your student loan will affect your ability to get a mortgage. The good news is that it is still possible to get a mortgage even if you have student loans. It just depends on your situation.

Key Takeaways

  • It is possible to get a mortgage even if you have student loans.
  • Lenders use your student loan payments to calculate your debt-to-income ratio (DTI).
  • You usually have to stay below the 43% DTI ratio to get a mortgage.
  • If you’re on a modified repayment plan, lenders have different ways of factoring your student loan payments into DTI calculations.

Factors Affecting Your Mortgage Approval

Your student loan will affect your mortgage in a number of different ways. Here are the main things you need to think about:

Debt to Income Ratio

Lenders set a maximum limit for what your monthly mortgage payments can be based on what percentage of your income goes to debt payments (including mortgages). This is known as the back-end, or total, debt-to-income (DTI) ratio. From there, they count back to see how much of a loan you can take responsibly. In most cases, you are limited to a DTI ratio of around 43%, although the specifications vary by loan type.

You can use this to calculate how much of a mortgage you may qualify for. For example, if your monthly gross income is $5,000, you should still combine all your debt payments under $2,150 ($5,000 x 0.43). If you make $150 student loan payments each month, that means you can afford a $2,000 monthly mortgage. Enter your details into a mortgage calculator to see how much loan—that is, how many homes you can afford—to stay below this threshold.

If you use an income-based payment plan (IDR), your monthly debt payments can be calculated in several different ways, depending on the type of loan you have.

Credit score

Your student loan can also affect your credit score. If you have made all payments on time, it can increase your score. If you miss a payment, it can reduce it.

Lenders also generally have minimum credit score requirements when you apply for a mortgage as well.

Student Loan Requirements for Different Types of Loans

In general, your student loan will have the greatest impact on your DTI ratio, which determines how much loan you can get. Below are the maximum back-end DTI ratios for the most common loan types.

Mortgage Type Maximum Back-End DTI Fannie Mae (conventional) 36% for manually secured loans, 45% if you meet certain credit and down payment requirements, 50% for certain software guaranteed loans Freddie Mac (conventional) 33 to 36% for most loans, 45% on a case by case basis FHA 43% for most loans, 45% for FHA Energy Saving Homes program VA 41% USDA 41%

Fannie Mae

Fannie Mae isn’t a lender you apply directly to—instead, along with Freddie Mac, it’s a government-sponsored company that buys mortgages from other lenders, who will work with you. This type of loan is called a conventional loan, and is the most common type of mortgage.

Fannie Mae has several ways to deal with loans that you don’t pay on a normal schedule. If you’re on an income-driven plan with $0 payments showing on your credit report, the good news: The loan won’t count towards your DTI at all. If your loan is tolerable or delayed, Fannie Mae calculates your payment as 1% of the amount you owe per month ($1,000 for a $100,000 loan, for example) or the actual normal payment if you can provide documentation to your lender.

Freddie Mac

Freddie Mac uses a different calculation if you pay off your student loans on a different schedule. In this case, it will calculate your monthly payment as the greater of:

  • 0.5% of your current loan balance (1% if your loan is on hold or on hold)
  • 0.5% of your initial loan balance (1% if your loan is on hold or on hold)
  • Anything currently listed on your credit report

There’s no way Freddie Mac would qualify you for a $0 monthly payment like Fannie Mae would.

FHA Loans

The rules on how student loans pay off for Federal Housing Administration (FHA) loans were recently relaxed. Previously, your student loan payments were calculated as whatever is listed on your credit report, or 1% of your loan balance, whichever is greater.

But starting June 2021, that amount is the amount listed on your credit report (if it’s over $0) or 0.5% of your loan balance (if it’s listed as $0 on your credit report). This will benefit you if you do not currently make payments on your loan. This effectively halves the “monthly payment” that lenders use to calculate your DTI and qualify you for a loan.

VA Loans

The Bureau of Veterans Affairs (VA) will not use monthly payments for student loans if you can demonstrate that the debt will be deferred for at least one year after you close the loan. Otherwise (and most of us do), your lender will use what’s listed on your credit report or 5% of your loan balance, divided by 12.

USDA Loans

If you have a fixed payment plan, your lender will use your current payment or 1% of your loan balance when offering a U.S. Department of Agriculture (USDA) mortgage. If your payment amount may change annually (such as with an income-driven plan), your lender will use 0.5% of your loan balance as your payment for the DTI calculation.

How to Qualify for a Mortgage With Student Loans

Having a student loan when you buy a home can put a damper on the type of home you can get. However, student loans don’t completely limit your ability to buy a home or qualify for a mortgage. If you are looking for a good mortgage advisor, they will be able to help you figure out what type of mortgage will work best for you and how it fits into your overall financial life.

You may even want to take a step back and look at your home buying goals in the context of your overall finances. A general financial advisor may be able to help you identify ways to make extra money to pay a larger down payment. They can also recommend money management strategies that can put you in a better position to buy a home in a year or two.

You should also consider the natural ups and downs of the housing market. If you are trying to buy a home in a seller’s market, you will face a lot of competition. If house prices are in the midst of a boom, you may be better off waiting for the market to cool down a bit.

Frequently Asked Questions (FAQ)

Can I get a mortgage with a student loan at Patience?

Yes. However, lenders have a different way of calculating your debt-to-income ratio, given that your current payment is $0 but will increase in the future. This can affect the size of the loan you may qualify for, depending on the type of mortgage you get.

Can you refinance student loans with a mortgage?

Yes, if you have sufficient equity in your home (that is, if you owe less on your home than it is worth). You will use a cash-out refinance and use the cash you get back to pay off your student loan. Fannie Mae even offers student loan refinancing mortgages specifically for this purpose.

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