Are deferred student loans excluded when you apply for a mortgage?
If your student loans are being deferred that means that you are not required to make monthly payments on the loan. Additionally, in most cases a student loan that is being deferred does not accrue interest which means no additional interest is added to your loan balance.
There are many ways to qualify for the deferment of your student loans including the following:
You are enrolled at least half-time in college or vocational school
You are enrolled in a graduate fellowship program
You are receiving treatment for cancer
You are enrolled in a training program for the disabled
You are unemployed
You are experiencing significant financial challenges
You are or were active duty military personnel serving in specific operations
You are serving in the Peace Corps
Depending on your personal circumstances and the reason why your student loans are being deferred, you may not be required to make loan payments for several years. Even though you are not making monthly payments, your student loans are still included in your mortgage application.
Lenders calculate a payment for your deferred student loans and include the payment in your debt-to-income ratio. The higher the monthly debt payment included in your ratio, the lower the mortgage amount you can afford and vice versa.
Lenders factor in your student loans -- even if you are not currently making a payment -- to make sure that you can afford both your mortgage and your loans if you are required to pay them simultaneously in the future.
The methodology used to determine the monthly payment attributable to deferred student loans varies by mortgage program and lender. Below we review the different approaches so that you can understand how your loans impact the mortgage you qualify for.
Conventional Mortgage - Freddie Mac Guidelines: the monthly payment for a deferred student loan is calculated as either 0.5% of the outstanding loan balance or the full payment amount according to your loan documents. For example, if you have $35,000 in student loans outstanding, the monthly debt payment included in your debt-to-income ratio is $175 ($35,000 * 0.5% = $175).
Conventional Mortgage - Fannie Mae Guidelines: the monthly payment for a student loan in deferment is calculated as either 1.0% of the outstanding loan balance or the full payment amount outlined on your loan documents. For example, if you have $35,000 in student loans outstanding, the monthly debt obligation included in your debt-to-income ratio is $350 ($35,000 * 1.0% = $350).
Use ourHOW MUCH HOME CAN I AFFORD CALCULATORto determine what price home you can buy factoring in your student loans
Freddie Mac and Fannie Mae do not provide mortgages directly but instead determine qualification requirements. Many lenders use both Freddie Mac and Fannie Mae student loan calculation methodologies so we recommend that you determine the approach that applies to you before you submit your mortgage application. Selecting a lender that uses the lower 0.5% calculation method should increase the mortgage amount you can afford.
We recommend that you contact multiple lenders in the table below to confirm how they calculate student loan payments and to find the best mortgage terms. Shopping several lenders is also the best way to save money on your mortgage.
View All Lenders%
FHA Mortgage Guidelines: if your credit report shows a required payment of zero, the monthly payment attributable to a deferred student loan is calculated as 0.5% of your current loan balance.
USDA Mortgage Guidelines: the student loan payment included in your mortgage application is 0.5% of your deferred loan balance.
VA Mortgage Guidelines: If the student loan is scheduled to be deferred for at least one year after your mortgage closes, the loan can be excluded from your debt-to-income ratio calculation. Please note that student loan debt for permanently disabled veterans is automatically forgiven unless you elect to opt out of the program.
If you do not meet the criteria outlined above for VA loans, the lender compares 5% of your loan balance divided by twelve to the payment listed on your credit report. If the payment on your credit report is higher, the lender factors the higher payment into your debt-to-income ratio. If the payment on your credit report is lower, the lender uses the lower payment as long as you provide documents that confirm the payment amount.
In closing, although your student loans may be deferred for multiple years does not mean they are excluded from your mortgage application or debt-to-income ratio. We advise you to review your financing options to find the lender and mortgage program that work best for your personal situation.
Sources
"Explore Student Loan Deferment and Forbearance." Federal Student Aid. U.S. Department of Education, 2019. Web.
"Student Loan Solutions, Frequently Asked Questions." Fannie Mae Single Family. Fannie Mae, July 2018. Web.
"II.A.4.b.iv.(H). Student Loans." FHA Single Family Housing Policy Handbook 4000.1. Federal Housing Administration, June 17 2021. Web.
« Return to Q&A Home About the author