Deferred Student Loans Are Not Deferred?

It used to be that when I was qualifying a mortgage borrower and they told me that their student loans were deferred, I could normally count on not using that debt against them in their debt ratios. However, as we all know underwriting guidelines are stricter these days. Now deferred student loans still have to be counted against mortgage borrowers’ debt ratios, even when no payments are being made and they are in deferred status.

You have to follow the below rules which will vary depending on what type of financing you are taking:

FHA loans:

FHA counts 1% of the balance as the monthly payment. $30,000 of deferred student loans = $300/month that will be counted in your debt ratios.

VA loans:

Student loans need to be deferred for at least 12 months in order to not count them against a mortgage borrowers’ debt ratios.

If written evidence shows the student loan debt will be deferred at least 12 months beyond the closing date, no monthly payment is counted.

If a student loan is in repayment or scheduled to begin within 12 months from the date of a VA mortgage loan closing, the lender must consider the anticipated monthly payment in calculating the debt-to-income ratio. A payment is established by calculating each loan at a rate of 5% of the outstanding balance divided by 12 months.

Example: A VA mortgage borrower has a $40,000 student loan balance, you multiple it by 5%, which equals $2,000. Then $2,000 is divided by 12 months to equal a monthly payment of $166.67.

If there is a loan payment reported on the credit report for a school loan that is greater than the payment calculation above, then the lender must use the payment from the credit report.

CONVENTIONAL loans:

You always have to count deferred student loans, no matter what the deferment status and no matter how long they are deferred for.

FNMA counts 1% of the balance as the monthly payment. $30,000 of deferred student loans = $300/month that will be counted in your debt ratios.

FHLMC counts .5% of the balance as the monthly payment. $30,000 of deferred student loans = $150/month that will be counted in your debt ratios.

Or the mortgage borrower will need to somehow document what the monthly payment will be when the loan comes out of deferment status. They’d also need to show what the timeframe on the deferment and repayment is.

And sometimes a bank will have their own rules on top of any Fannie Mae, Freddie Mac, FHA and VA rules. In the mortgage industry these additional rules are called “overlays.” You should ask any mortgage loan officer you may work with to confirm if the loan you are choosing has any loan overlays.

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