If you graduated college loaded with student loans, you aren’t alone. The average graduate has around $37,000 in debt and this only accounts for graduates with a bachelor’s degree. Those that go on even further can have hundreds of thousands of dollars in student debt.
Oftentimes, students are able to defer their student loan payments while they are in school and even for a while afterward. What if they want to apply for a mortgage within that time, though? How will the mortgage lender look at the debt?
It depends on the type of mortgage you try to get. Each program has their own guidelines.
You can get a Fannie Mae or Freddie Mac conventional loan. Each entity has their own requirements regarding deferred student loans.
Fannie Mae says:
- The lender must use the payment reporting on the credit report, if it’s reporting. This should be the fully amortizing payment.
- The lender can use a recalculated payment if the borrower can provide documentation from the loan servicer proving the lower payment. The lower payment must also show that it satisfies the loan’s amortization.
- The lender must use one percent of the loan balance if neither of the above figures are known.
Freddie Mac says:
- The lender must use the payment that the credit bureaus report.
- The lender can also use documentation provided by the lender stating the payment amount even if the borrower isn’t making payments yet.
- The lender must use one percent of the loan amount if there isn’t evidence of a required payment.
The FHA has a bit stricter requirements, which is surprising since they have flexible guidelines. The FHA states that the lender must look at both the payment reporting on the credit report and the payment that one percent of the loan amount amounts to and choose the larger payment.
This will help the lender make sure that they don’t qualify you for more mortgage than you can afford. If they don’t use a high enough payment to qualify you for the FHA loan, and you start to struggle when your student loan payments become due, it can put the lender at risk for default.
The USDA also uses the above guidelines, which helps them avoid loaning too much money to borrowers in rural areas.
The VA is the exception to the rule. They are the only loan program that will not use a deferred student loan payment in the calculation of the debt-to-income ratio if the loans are deferred for 12 months. In order to qualify for this exception, you must provide official proof that the loan is deferred for at least 12 months, though.
If you will need to make payments on your student loans within the next 12 months, though, the payment must be included. The VA requires the lender to determine the amount of the payment as reported on the credit report. The lender should then compare that payment to the threshold payment, which is:
Loan amount x 0.05 = Annual Payment/12 = Monthly payment
If the credit report shows a lower payment, the borrower must supplement it with proof from the student loan servicer that the payment is that low.
The bottom line is that deferred student loans do affect your debt-to-income ratio for every loan except the VA loan if you don’t need to make payments for at least 12 months. It’s a good thing that lenders do include it though, as it can prevent you from taking out a mortgage that you won’t be able to afford in the near future.