Figuring out how student loans count against you in a mortgage application can be confusing. It also depends on the type of loan you’re getting. What does a mortgage lender do when a mortgage borrower has a student loan with no monthly payment? How about if your student loan is deferred? Then what is required? There may be a monthly payment used in calculating your debt ratios, even if you are required to pay nothing.
Or what if your student loan is based on an income based repayment plan?
How Do Student Loans Count Against You in a Mortgage Application?
If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes.
If the credit report does not reflect the correct monthly payment, the lender may use the monthly payment that is on the most recent monthly student loan statement to qualify the borrower.
What if both the credit report and the student loan documentation do not provide a monthly payment for the student loan?
INCOME BASED REPAYMENT LOANS
- If the borrower is on an “income-driven payment plan”, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment, if that is what is documented.
DEFERRED STUDENT LOANS
- For deferred loans or loans in forbearance, the lender must calculate a payment. The payment depends on the agency backing the loan.
- Fannie Mae loans requires 1% of the outstanding student loan balance. Example: $30,000 balance owed x 1% = $300/month payment used in debt ratios. But if the fully amortizing payment using the documented loan terms is lower, that may be used.
- Freddie Mac only requires .5% of the outstanding student loan balance. Example: $30,000 balance owed x .5% = 150/month payment used in debt ratios.
- FHA counts 1%, just like Fannie Mae in the example above.
VA LOANS
- Deferred VA student loans may not be required to have a payment counted in the debt ratios. But they need to be deferred for at least 12 months to not count them.
- If written evidence shows the student loan debt will be deferred at least 12 months beyond the closing date, no monthly payment is counted.
- What if a student loan is in repayment or scheduled to begin within 12 months from the date of a VA mortgage loan closing? Then 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 $30,000 student loan balance, you multiple it by 5%, which equals $1,500. Then $1,500 is divided by 12 months to equal a monthly payment of $125.
- 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.
CONCLUSION – How Do Student Loans Count Against You in a Mortgage Application?
As you can see deferred student loans, student loans in forbearance, and student loans based on income based for payment plans can be complicated to know what to calculate in your debt ratios.
Have more questions about student loans, or other mortgage questions? Contact me to discuss your questions. Click here to schedule a call, or you can email me directly. You can also get a rate quote according to your specific scenario by clicking here.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
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