Can I Buy a House If My Student Loans Are in Deferment?

Buying a home is a significant financial milestone, but for many, student loan debt can seem like an obstacle. It is possible to purchase a house even if your student loans are in deferment, though this introduces specific considerations for mortgage qualification. While deferment temporarily pauses your payments, lenders still account for this debt when determining your eligibility. Understanding how mortgage providers view deferred student loans is key to navigating the homebuying process.

Understanding Student Loan Deferment and Mortgage Impact

Student loan deferment allows borrowers to temporarily postpone their loan payments due to specific circumstances, such as continuing education, economic hardship, or unemployment. Lenders assess your debt-to-income (DTI) ratio, a measure of your monthly debt obligations against your gross monthly income. A higher DTI ratio can signal greater risk, potentially affecting loan approval or terms.

Lenders determine an estimated monthly payment for deferred student loans to include in your DTI calculation. Common methods involve using a percentage of the outstanding loan balance, such as 0.5% or 1%. If your credit report shows a different payment amount, or if you are on an income-driven repayment (IDR) plan with a specific payment, lenders might use that documented figure instead. The method used significantly influences your DTI, directly impacting how much mortgage you can qualify for.

Different Mortgage Loan Programs

Various mortgage loan programs have distinct rules for how deferred student loans are factored into DTI ratios.

For Conventional loans, which adhere to Fannie Mae and Freddie Mac guidelines:
Fannie Mae generally requires lenders to use 1% of the outstanding student loan balance as a monthly payment if the credit report shows a $0 payment. If a specific payment is listed, that amount may be used.
Freddie Mac typically calculates 0.5% of the outstanding student loan balance as a monthly payment if no payment is reported.

For Federal Housing Administration (FHA) loans:
If your student loan payment is $0 or in deferment, lenders must use 0.5% of the outstanding loan balance for DTI calculation.
If you are on an income-driven repayment plan and your actual monthly payment is greater than $0, the FHA lender can use that documented amount.
FHA loans often permit higher DTI ratios, providing more flexibility for borrowers with student loans.

For VA loans, designed for eligible service members, veterans, and surviving spouses:
If your student loans are deferred for at least 12 months beyond the mortgage closing date and the deferment is not due to financial hardship, VA lenders may not include these loans in your DTI calculation.
Otherwise, if payments are active or deferment is shorter, lenders typically calculate an estimated payment by taking 5% of the outstanding loan balance and dividing it by 12 months.

Preparing for Your Mortgage Application

Before applying for a mortgage, particularly with deferred student loans, taking preparatory steps can streamline the process.
Obtain copies of your credit reports from all three major bureaus and review them for accuracy. Understanding your credit score is important, as it influences loan terms and approval. Correcting discrepancies can improve your credit standing.
Calculate your estimated debt-to-income ratio using the methods lenders employ for deferred student loans. This involves summing your monthly debt payments, including the estimated student loan payment, and dividing by your gross monthly income.
Gather all necessary financial documents in advance, such as recent pay stubs, tax returns from the past two years, bank statements, and comprehensive student loan statements.
Engage with a lender early for pre-approval. This step provides a clear understanding of how much you may be able to borrow and allows you to discuss your deferred student loan status, ensuring the lender can properly assess your financial situation.

The Mortgage Application Process

Once you have completed your preparation and found a suitable property, the mortgage application process begins. You will formally submit your application, providing all financial documentation. The lender’s underwriting department will then review your financial profile, including income, assets, credit history, and existing debts like deferred student loans. This detailed examination ensures you meet eligibility requirements.

During underwriting, lenders verify the information provided, often contacting employers and financial institutions to confirm income and account balances. They also confirm the status and terms of your student loans, assessing how deferred payments impact your DTI ratio. Timely communication is important during this stage, as the underwriter may request additional documents or clarifications. Concurrently, an appraisal of the property will be conducted to determine its market value, and a title search will ensure clear ownership. Upon successful completion of underwriting, your loan will be approved, leading to final closing procedures where documents are signed and property ownership is transferred.