How student loans impact your debt-to-income ratio

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,” says 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.”

How to get a mortgage when you have student loans

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 Donny Schulze, a mortgage banker with Embrace Home Loans in Hauppauge, New York.
• Consider adding a co-borrower to the loan. “Additional income always helps with qualification,” says 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,” says Tayne.

Mortgage options for homebuyers with student loans

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

• 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
• Freddie Mac HomeOne loan — Another low-down payment option offered by Freddie Mac specifically for first-time homebuyers.
• 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

Guidelines for student loans by mortgage type

Whether you’re currently making student loan payments or have a deferral or forbearance plan, mortgage-backers Fannie Mae, Freddie Mac, the Federal Housing Administration, U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) impose DTI ratio guidelines depending on your situation.

If all of your student loan debt has been forgiven, on the other hand, it won’t be accounted for in your DTI ratio, so long as you can provide documentation to the fact.

Conventional mortgage guidelines for student loans

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 student loan 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 student loan 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 is also true for other types of debt, like auto loans.)

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

As is the case with a conventional loan, for FHA loans, 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,” says 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 Schulze. 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

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

Should you pay off your student loans before buying a house?

While you can qualify for a mortgage while carrying student loans, there are some cases when paying off student debt first might be the better call. If your student loans have a higher interest rate, for example, you might want to focus any extra money toward paying them off. Likewise, if you plan to buy a home in a more expensive area, lowering your DTI ratio can help you afford more house.