Student Debt
If you have student debt, you may still qualify for a mortgage. Home ownership is all about debt-to-income (DTI) ratios, see below. Student debt adds a monthly payment that can make getting a mortgage harder. It is a good idea to speak to a mortgage loan officer who can review your student debt and advise you on home ownership.
Credit Rating
Your credit score will be important in deciding whether or not you can get a mortgage. You can check to see if your score has been affected by repayment of your student debt. Your credit score ranges from a low of 300 to a high of 850. The largest credit-scoring agencies, Equifax, Experian, and TransUnion will give you a free credit score every 12 months. You will need your social security number, your name and birthday, and your address. Go to annualcreditreport.com to get one. Also, your credit card company may give you a free credit score. These sources are more reliable than other free reports.
Debt-to-Income Ratio
We compare how much money you owe to how much money you make, called a debt-to-income ratio (DTI). For clients with student loan debt, we have to calculate your Total DTI.
We add up your student loan payment and any other monthly payments like auto, credit card, or child support. We figure your Total DTI by taking your house payment plus the other monthly payments as a percentage of your gross monthly income.
If your house payment is $1,000 and your student loan payment is $500, you have total monthly payments of $1,500. This is 37 percent total DTI based on gross monthly income of $4,000. The best borrower will have a total DTI that is 35 to 45 percent.
To improve your DTI consider paying off smaller loans such as a car loan or credit card debt. Check to see if you can refinance your student debt to a lower interest rate. If you do refinance, make your payment on time for six months before getting a mortgage. This will boost your credit score.
Conventional, FHA, and USDA Loans
Guidelines for student debt are different for each mortgage product. Conventional, FHA, and USDA loans (see VA loans, below) ask us to calculate student debt whether in repayment, deferment, or forbearance, as follows,
- If the monthly payment amount is greater than zero, we must use the monthly payment amount reported on the credit report or other file documentation, or
- If the monthly payment amount reported on the credit report is not included or zero, we must use 0.5% of the outstanding loan balance as reported on the credit report.
Excluding Debt Payments
By 2017, both Fannie and Freddie, which set the student debt guidelines for conventional loans, elected to exclude debt that is paid by others from the ratio. If any part of your debt—student loans, car payments, child support, or credit card balances—is being paid by others, it won’t count in your debt-to-income ratio. However, you’ll have to prove someone else is paying your debt by showing 1-year of canceled checks. Again, if a family member or employer is paying off your student loan or other debts, the debt will not count when you apply for a mortgage.
VA Loans
Different rules apply for veterans under a VA loan. If you are a veteran and get written evidence your student loan will be DEFERRED at least 12 months beyond the date of final purchase of a home, your student debt will not be counted in your Total DTI.
If you are making student loan payments or scheduled to begin a payment within 12 months, we have to count the monthly payment in your Total DTI. We figure the payment as follows,
We calculate each loan at a rate of 5 percent of the outstanding balance divided by 12 months. For example, if you have a $25,000 student loan balance, we take that amount x 5% = $1,250 divided by 12 months = $104.17. This would be your monthly payment for debt ratio purposes
- If the payment on your credit report is higher than what we calculate, we have to use the higher payment.
- If the payment on your credit report is lower, we have to get a statement as evidence, and it must be dated within 60 days of your date of final purchase..
Swap Student Debt for Mortgage Debt
If you or a family member owns a home, you can use home equity to wipe out student debt. The first question should be whether you can refinance your student debt along with an existing home to get a lower interest rate (student loan rates are higher than mortgage rates). Fannie Mae offers a lower rate to these borrowers by eliminating the usual fees lenders charge for cash-out refinances. The total student debt is added to the mortgage amount being refinanced. Anybody—parent, grandparent—can take advantage of this program, using the rules above to calculate debt, so long as the cash received from the refinancing is used to pay off a student loan IN FULL.
If you do use a mortgage refinance to pay off a student loan, you can no longer pay off debt according to income and/or pause payments. Furthermore, your home becomes collateral for the debt and can be seized if you default on payments. However, if you are looking for a better interest rate and are willing to give up these program protections, you should pursue a mortgage.
