College graduates often come home laden with student debt. Luckily, many student loans can be deferred. This means you may not owe payments for a few years. Just how does Fannie Mae look at those payments, though?
Calculating Deferred Loan Payments
Fannie Mae allows lenders to use one of two methods when determining the required payment on a deferred loan. Even though this payment could be deferred for several years, Fannie Mae wants lenders to make sure the borrower can afford the mortgage payment with the student loan. It makes sense since eventually, you will have to make the student loan payments and the mortgage at the same time.
Your Fannie Mae lender will use one of the following calculations:
- 1% of the outstanding balance at the time of the loan application – The lender can literally take 1% of the balance you owe at this time. For example, if you owe $30,000, the lender would use $300 for the payment. This is the case even if the regularly amortized payment would be higher.
- The payment reporting on the latest documents from the student loan lender – If you have other documentation showing what your payment will be after the deferment, the lender can use this documentation too.
How the Deferred Payment Affects Your Chances of Approval
No matter if your payment is deferred or you pay it now, student loans affect your debt ratio. Lenders need to know that you can afford the new mortgage payment alongside the student loans and any other debt you already have.
Fannie Mae is fairly liberal with their allowed debt ratios. In general, you would expect Fannie Mae lenders to require a 28% front-end ratio and 36% back-end ratio. However, many Fannie Mae lenders are able to allow a total debt ratio of as much as 50%, assuming you have other qualifying factors that make up for it.
Whether or not the payments are deferred, you will need to figure them into your debt ratio to see how well you can afford them. While it might seem like it makes it harder to qualify for a loan, it is meant to protect you. Fannie Mae doesn’t want you to get in over your head, taking out a mortgage that will make you struggle financially once the student loans become due.
Other Student Loan Payment Options
If you didn’t defer your student loans, but rather used the Income-Based Repayment Plan, Fannie Mae looks at this plan a little differently. You will still need to figure the payment into your debt ratio, but you may get lucky enough to have a $0 payment used by the lender.
Your student loan lender determines your Income-Based Repayment payment. If you don’t make enough money based on their guidelines, you may have a $0 payment right now. As long as you can provide proof that the payment is $0 and it’s official proof from the lender, your mortgage lender can use $0, which won’t affect your debt ratio.
Get Compensating Factors
If your deferred student loan boosts your debt ratio up too high, you may be able to get by with other compensating factors. For example, a high credit score shows a lender that you are financially responsible. This may help offset the risk that the high debt ratio causes, allowing a lender to approve you for the loan.
Other compensating factors include:
- Liquid assets on hand – Lenders like to see borrowers that have reserves on hand. This is liquid assets you have on hand that can cover the mortgage payment if your income stopped. The more mortgage payments you can cover with your assets, the higher your likelihood of approval.
- Stable income/employment – If you’ve had the same job for at least 2 years and your income steadily increased over that time, you may be able to get by with a higher debt ratio. Stable employment shows lenders consistency, which they want to see to make sure you are a good risk.
Deferred student loans don’t necessarily break your chance at mortgage approval. Make sure you shop around with several lenders to see how they will handle your deferred student loans. Fannie Mae has their guidelines, which are somewhat flexible, but some lenders prefer to use only the maximum student loan payment for DTI calculation. If you come across that, shop around for other lenders that will use the Fannie Mae guidelines without any overlays.