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How to Get a Mortgage with Student Loans

How to Get a Mortgage with Student Loans

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
  • How is Student Loan Debt Treated When You Apply for a Mortgage?
  • Under most circumstances student loan payments are treated like other types of monthly debt payments such as car loans and credit card bills. Your monthly student loan payment is included as debt when the lender calculates your debt-to-income ratio to determine what size mortgage you can afford.

    Your debt-to-income ratio is the ratio of your monthly debt payments to your monthly gross income. Your debt payments include total monthly housing expense plus other monthly debt payments including credit card, auto and student loans as well as alimony, spousal or child support payments, if applicable. Total monthly housing expense includes your monthly mortgage payment, property tax, homeowners insurance as well as other potential housing-related expenses such as mortgage insurance fees and homeowners association (HOA) dues, if applicable.

    Lenders only allow borrowers to spend so much of their monthly gross income and debt expense and that limit is the debt-to-income ratio. The maximum debt-to-income ratio permitted varies by mortgage program and other factors but lenders typically apply a debt-to-income ratio limit of 43% - 50%.

    From the standpoint of a borrower with student loan debt, the more money you spend on your monthly student loan payment, the less money you can spend on your mortgage and other monthly housing expenses which reduces the size of the mortgage you can afford. This is why student loans can make it more challenging to qualify for a mortgage.

  • CalculatorUse our MORTGAGE QUALIFICATION CALCULATOR to determine what size mortgage you can afford based on your loan payments and income
  • Student loans can also make it more challenging to save for the down payment to buy a home, which is another consideration for borrowers.

  • What if My Student Loan Payment is Lower than What Is Outlined in My Original Loan Documents?
  • Many borrowers who are on income-driven repayment (IDR) plans make monthly payments that are lower than the monthly payment stated in your original student loan documents, including no monthly payment in certain cases. If you are on an income-driven repayment plan (IDR) the lender uses the lower monthly student loan payment you are actually making as long as that payment is reflected on your credit report or you provide loan documentation that verifies the plan and lower payment. For example, if you were supposed to make a monthly payment of $350 according to your student loan documents but you currently make a $150 payment according to the terms of an income-driven repayment plan, then the lender use the $150 figure to calculate your debt-to-income ratio to determine how much mortgage you can afford.

    In the past lenders would use the payment outlined in your original student loan documents to calculate your debt-to-income which meant mortgage borrowers could not benefit from the lower payment they were actually making. According to revised lender guidelines, the actual student loan payment you are currently making according to your credit report is included in your debt-to-income ratio, which can make it easier to qualify for a mortgage.

  • What Happens if My Actual Student Loan Payment is Different than the Payment Stated on My Credit Report?
  • In some cases, the credit report for borrowers on income-driven repayment plans may not accurately reflect the current monthly student loan payment the borrower is making. For example, the credit report may state the original, required student loan payment instead of the lower, income-driven required payment. In this case, as long as you provide loan documentation that verifies the plan and lower payment, the lender uses the lower monthly payment. The lender may also request a credit report supplement or updated credit report that shows the correct monthly student loan payment.

  • How are Student Loans that are Being Deferred or in Forbearance Treated When You Apply for a Mortgage? Do Lenders Exclude Them?
  • Some people think that if their loan is being deferred or in forbearance then it is excluded from their mortgage application but that is not accurate. Based on standard mortgage guidelines for conventional mortgages, payments on students loans that are in deferment or forbearance are still included when you apply for a mortgage, even if your required monthly payment is $0 according to your credit report.  Even though you may not be required to make a payment, lenders include one in your debt-to-income ratio because you may be required to start repaying your loans in the future and they want to make sure that you can afford both your student loans and your mortgage. 

    For loans that are deferred or in forbearance, the monthly payment for the loan is calculated as either 0.5% or 1% of the outstanding loan balance or the full payment amount according to your loan documents, depending on the lender and loan program.  For example, if you have $30,000 in student loans outstanding and the lender applies the 1% method, the monthly payment that is included in your debt-to-income ratio when you apply for a mortgage is $300 ($30,000 * 1% = $300).  If the lender uses the 0.5% method, the monthly payment included in the ratio would be $150.  The added monthly debt expense attributable to the student loans reduces the mortgage amount you can afford.

    The same general student loan guidelines also apply to FHA and USDA mortgages. When you apply for an FHA or USDA mortgage, for student loans being deferred or in forbearance, the monthly debt payment used by the lender is the greater of 1% of the outstanding loan balance or the loan payment stated on your credit report.

    The student loan rules for VA Mortgage are a little more flexible and borrower-friendly. As long as the student loan is expected to be deferred or in forbearance for at least a year after the mortgage closes, then the lender can exclude the student loan from the borrower’s debt-to-income ratio calculation.

    Because payment calculation methods for student loans that are deferred or in forbearance vary by lender and loan program we recommend that you confirm the approach used by your lender before you apply for a mortgage.

  • Are There Any Ways to Exclude Your Student Loan Payments When You Apply for a Mortgage?
  • The only ways to exclude your student loan payments when you apply for a mortgage are if your income-driven repayment plan does not require a monthly payment or if your monthly student loan payments have been paid in their entirety by a another party, such as a relative, for the prior twelve months. For example, if your parents have paid your students loans for the past year, then your student loan payments are not included in your debt-to-income ratio when you apply for a mortgage, even though you are still legally responsible for the loans. (This rule also applies to other non-mortgage debt such as credit cards and car loans).

    Please note that for student loan debt to be excluded under this scenario, the other party is required to make the entire payment for the prior twelve months and not any partial payments. The borrower is also required to provide the lender bank statements or cancelled checks from the party that paid the loans to verify that the payments have been made in full and on time.

    If you are thinking about applying for a mortgage in the future but do not have the funds to payoff your student loans then getting a helping hand from someone to pay your student loans for a year can improve your ability to qualify for a mortgage.

  • Can You Take Cash Out When You Buy a Home to Pay Down Student Loans?
  • Aside from highly specialized, very uncommon loan programs, you cannot take money out when you get a mortgage to buy a home to pay down or pay off your student loans. Some lenders enable borrowers to use a small portion of proceeds from a home purchase mortgage to pay off a portion of their student loans; however, these programs are highly unusual and typically limit the amount of proceeds you can use to pay off your student loans to $3,000. These programs may also impose significant borrower restrictions such as the type or location of home you can purchase.

    A small number of state or local housing commissions may also offer student loan assistance when you purchase a home but these programs also typically impose significant restrictions (such as buying a home out of foreclosure). Although these programs are very challenging to find, you can contact your state or local housing commission STATE PROGRAMS to understand if they offer a student loan assistance program that apply to you.

  • Can You Take Cash Out When You Refinance to Pay Off Student Loans?
  • Yes. Most lenders offer a student loan cash-out refinance program that enables you to use the proceeds from a cash-out refinance to pay off your student loans. In fact, a student loan cash-out refinance usually charges a lower mortgage rate than a standard cash-out refinance due to special pricing for this program because paying off or down your student loans improves your ability to repay your mortgage so you are a less risky borrower.

    Please note that to qualify for the program, at least one student loan must be paid in full as partial payoffs of student loans are not permitted and the loan proceeds must be disbursed directly to the student loan lender. Additionally, the borrower cannot personally receive more than $2,000 in proceeds from a student loan cash-out refinance.

    The maximum loan-to-value (LTV) ratio for a student loan cash-out refinance is typically 80% for a single unit property which means the borrower must have sufficient equity in their home to both pay off their student loan as well as their mortgage and any other debts against the property. The borrower must also qualify for the loan based on their credit score, debt-to-income ratio, employment history and other borrower qualification guidelines.

    The student loan cash-out refinance program applies to both students and other parties such as parents who have taken out or guaranteed student loan debt. For example, parents can use the program to access the equity in their home to pay off student loan debt that have taken out on behalf of their children.

    We recommend that you contact multiple lenders in the table below to learn more about applying for a mortgage with student loans.  Comparing lenders and loan proposals enables you to find the mortgage loan terms.

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  • Sources

    Mortgage Guidelines for Student Loans: https://www.fanniemae.com/content/faq/student-loan-solutions-faqs.pdf

    Student Loan Payment Guidelines: http://www.freddiemac.com/singlefamily/guide/bulletins/pdf/bll1813.pdf

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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