September 30th, 2019 8:15 PM by Devin Murray
Last week we received a call from a young professional who is gearing up to make his first home purchase. He had good credit, steady annual income, and enough money saved for a small down payment on a new home for the family. During the call, he voiced concern about the pre-approval amount he qualified for because of his student loans. He had basically no debt other than a little over $130k in student loans all in deferment for the next 11 months and was of the mindset that this debt would not count against him as a result. His credit report showed a $0/mo payment and he was a little confused as to why when he spoke to different lenders local, regional, and national each offered very different opinions on the purchase amount he could qualify for.
In the universe of mortgage financing student loans are analyzed by credit underwriters according to three main data points that normally appear on your credit report in order of importance: Repayment status, monthly payment, and current balance.
While monthly payment and balance don’t need further elaboration, knowing your repayment status and how it impacts how your payment is viewed by creditors is a little confusing. For anyone seeking a mortgage your student loan is considered to be in a Regular Repayment status if the monthly payment is fixed and is fully amortized over full term (i.e. 5,10, 15 or 20 years) of the loan. The best case scenario here is when the fully amortized monthly payment amount(s) appear on the credit report along with your balance(s). In some cases you can be at the start (or restart) of regular repayment status, but the payment amount does not show on the credit report and you can clear this up with documentation from your student loan servicer showing what the payment should be.
If your student loan is not in a regular repayment status you are most likely in Deferment, Forbearance, Graduated Payment plan, or an Income Drive Repayment (IDR) plan. No matter what your scenario, having one of these status means you are paying an amount less than the fully amortized payment or you aren't paying anything at all. When applying for a mortgage your credit report will show one of the following: no monthly payment (as in no number appears in the payment field), a $0/month payment is listed, or a payment significantly smaller monthly payment with respect to the balance of the student loan(s). None of this disqualifies you from getting a loan but the debt will most likely be counted toward your debt ratio using several different methods which will impact what you can and cannot finance.
FHA: FHA underwriting is the most inflexible next to USDA with respect to student loans. If you are not in regular repayment status, FHA will use the greater of 1% of the outstanding principal balance or the monthly payment on the credit report. While highly unlikely, if documenting the fully amortized payment over the life of the loan proves to be less than the 1% or payment showing on the credit the fully amortized payment can be used.
USDA (Rural): USDA underwriting always defaults to 1% of student loan balance monthly payment calculation method or the payment that appears on the credit report, whichever is more, no exceptions. Combined with the most conservative debt ratio across the board the USDA loan can be very difficult for any borrower(s) with student loans. Other restrictions like family household income limits and property eligibility also apply to USDA loans. Just as with FHA, USDA loans have great offerings too.
Conventional: If you are talking to a lender, regardless if you have student loans, ask if they offer both conventional loans underwritten by both Fannie and Freddie Mac. If they don’t and you are buying/refinancing in Alabama or Florida call us at 888-269-8335. We say this because not all conventional loans are the same and this advice will be true even if you have no student loan debt.
So for our example above using a conventional loan underwritten by Freddie Mac versus Fannie Mae, Freddie is twice as flexible with the student loan debt in that it would calculate our borrower’s projected student loan payments at $650/mo versus $1,300/mo.
VA: For eligible veterans it is no surprise that the VA is likely the most flexible with student loans. VA underwriters will use the greater of the student loan payment listed on credit report or 0.42% of the balance (that is 5% divided by 12 months). If the 0.42% is greater the actual payments can be used with a letter from the servicer. IDR plans resulting in a monthly payment greater than $0/mo can be used, and IDR plans resulting in a $0/mo payment can be used if they continue 12 months beyond the loan funding date. Also loans deferred loans beyond 12 months of the loan funding date can be calculated at $0.
If our borrower would have been eligible for a VA loan, the payment calculated by underwriting would be $546/mo versus $650 (Freddie) or $1,300 (Fannie Mae).
Jumbo: Other than to state our own, there is no industry-wide standard for student loan requirements on jumbo loans (amounts over $484,500 as of Oct 2019 in AL and FL (exclude Monroe Co)). Loans in repayment can use the payment on the credit report or documentation of actual. Any loans showing a $0 payment will use the 1% of balance monthly payment calculation. We have other info available on this blog for Jumbo Loans and Jumbo Construction Loans.
If the numerical differences between how these student loans are calculated from program to program doesn’t seem important, know that for this buyer it meant being able to afford the $325,000 home in a much better neighborhood with better schools over a $210,000 property. For some it might mean the ability to buy versus not being able to buy at all. For others it might mean being unable to refinance their existing loan.
Other than Google (j/k Google) there is no evil company preventing people from getting the most truthful information. With loan guidelines that are updated several times a year and lenders enacting their own overlays on top of those rules will only result in growing public confusion on this and many other topics related to mortgages. Missing just a little information about how debt impacts you can lead to all kinds of financial decisions that can impact you and your family today and for many years to come. We believe that empowering yourself with solid information and picking a lender with the highest level of expertise in the marketplace are your keys to success with home buying and refinancing.
If you have student loans and are buying, refinancing, or building a home in Alabama or Florida we urge you to seek out information like this and contact us with questions. No two scenarios are ever the same and we’d love the chance to get to know you and help you plan your future.
If you want to find out how much you can qualify for today, complete our online application 24 hours a day, 7 days a week.
Can I buy a house if I have student loans?
Can deferred student loans keep me from getting a mortgage?
Do deferred student loans count when applying for a mortgage?
Will student loans in forbearance keep me from getting a mortgage?
Can I afford more house if my student loans are in a graduated re-payment plan?
Does student loan forgiveness in the future allow me to buy a house now?