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How to Get a Mortgage with Student Loans

How to Get a Mortgage with Student Loans

  • 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 $250 ($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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    Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
     
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    P & I More Info
    Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
    Mortgage Insurance More Info
    Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
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    Property Tax More Info
    Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
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    Homeowner Insurance More Info
    Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
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    Homeowner Association Fee More Info
    Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
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    Points More Info
    Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
    Origination Fee More Info
    Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
    Credit Report Fee More Info
    Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
    Tax Service Fee More Info
    Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
    Processing Fee More Info
    Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
    Underwriting Fee More Info
    Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
    Wire Transfer Fee More Info
    Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
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    FHA Upfront Premium More Info
    FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
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    Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

    The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

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    *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
    Current Mortgage Rates as of December 11, 2018
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    Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
  • 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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