By Ian Murdock | With more people carrying the debt of their education through student loans, it is important to consider how these loans may impact your ability to qualify for a mortgage – but the news is likely more positive than you might imagine.
The Federal Reserve recently reported that there are now 44.2 million Americans carrying $1.44 trillion in total U.S. student loan debt. The average monthly student loan payment (for a borrower aged 20 to 30 years) is $351. Given these statistics, it’s likely that you or a family member carries some amount of student loan debt that could have an impact on your ability to qualify for a mortgage.
A borrower can apply with their student loan servicer for special consideration of their income in the calculation of their monthly payments, thus tying more reasonable payments to their level of income. You can learn more about income-driven repayment here. This can be especially important for a student fresh out of college whose income starts out on the low side, but who expects that income to grow over time as they advance in their career. This is called Income-Based Repayment (IBR) and has been available for federal student loans since 2009.
Fannie Mae and Freddie Mac, the two government-sponsored enterprises and purchasers of conventional mortgages, are responsible for issuing guidelines that spell out how they will treat student loan payments in relation to a borrower’s debt-to-income ratio. Recently, Fannie Mae amended its guidelines to match the more lenient policies of Freddie Mac.
Both of them will now allow lenders to use the student loan payment that appears on a borrower’s credit report, whether that is an IBR payment or simply the payment required to pay off the loan in its regular term. For instance, if you have a student loan with a $19,000 balance, the IBR payment showing on your credit report could be as low as $40 per month, while your regular payment could be $220. Using the lower payment in the calculation of your debt-to-income ratio could result in your qualifying for a higher-priced home.
FHA mortgages are a different matter. These mortgages are insured by the Federal Housing Administration and have lower down payment and credit score requirements than conventional mortgages. For most situations, FHA will be a bit more conservative in their treatment of student loans, usually requiring the use of 1% of the student loan balance as the worst-case scenario payment, even if the credit report shows a lower payment. In the example above, this would mean using a payment of $190.
If you’re a veteran of the military or a medical doctor or resident, you’ll qualify for a further benefit of special treatment. So long as your credit report shows that the payment on your student loan is deferred for a minimum of 12 months from the closing date of your new mortgage, the entire payment can be excluded from your debt-to-income ratio.
I hope this information proves useful as you consider your own situation. As always, feel free to reach out to me if you have specific questions.
The opinions expressed in this email are those of the author and do not necessarily reflect the official policy or position of Mortgage Trust, Inc. This is for informational purposes only. This is not a commitment to lend. Mortgage Trust, Inc. is an Equal Housing Lender, NMLS 3250.
Mortgage Trust, Inc. is an Equal Housing Lender. NMLS 3250