Can You Get a Mortgage With Student Loans?

Many people with student loan debt wonder if homeownership is possible. Student loans do not automatically disqualify you from obtaining a mortgage. This article explains how student loans are considered during a mortgage application and outlines steps to improve your chances of approval.

How Student Loans Affect Mortgage Eligibility

Student loans significantly influence mortgage eligibility primarily through the debt-to-income (DTI) ratio. This ratio is a key metric that mortgage lenders use to assess a borrower’s ability to manage monthly payments and repay a new loan. The DTI ratio compares your total monthly debt payments to your gross monthly income.

Lenders examine two forms of DTI: front-end and back-end. Front-end DTI focuses on housing expenses like mortgage payments, property taxes, and homeowner’s insurance. Back-end DTI, more impactful, includes all monthly debt obligations: student loans, car loans, credit card minimums, and new housing expenses. Most lenders prefer a back-end DTI below 36%, though some programs allow higher percentages. A higher DTI, influenced by student loan payments, can limit borrowing or affect eligibility.

Timely student loan payments can positively contribute to your credit history, demonstrating responsible debt management. Conversely, missed or late payments can negatively impact your credit score, which is another important factor lenders evaluate. A strong credit score generally leads to more favorable interest rates and better loan terms. Therefore, managing your student loans responsibly is important for both your DTI and credit profile.

Calculating Student Loan Payments for Mortgage Applications

The method lenders use to calculate your student loan payment for DTI purposes varies based on the loan’s repayment status and the mortgage program. For student loans in standard repayment, lenders generally use the actual monthly payment reported on your credit report. This straightforward approach reflects the current financial obligation.

For Income-Driven Repayment (IDR) plans, where payments can be as low as $0, the calculation is more nuanced. Some lenders use the actual IDR payment, even if $0. Others may impute a hypothetical payment, often 0.5% or 1% of the outstanding loan balance, especially if the reported IDR payment is very low or zero. This imputed payment can significantly impact your DTI.

Student loans in deferment or forbearance, where no payments are currently required, are typically not excluded from DTI calculations. Lenders generally still impute a payment for these loans. This is commonly calculated as 0.5% or 1% of the outstanding loan balance, similar to how some IDR plans are treated. Lenders will require documentation, such as student loan statements, to verify balances and repayment statuses.

Strategies to Improve Your Mortgage Chances

Improving your debt-to-income (DTI) ratio is a primary strategy for increasing your mortgage chances. One effective way is to reduce other monthly debts. Paying down credit card balances or other installment loans can lower your total monthly debt obligations, directly improving your DTI. Increasing your verifiable gross monthly income can also improve your DTI, as it expands the denominator of the ratio.

Understanding how your specific student loan status will be calculated by various lenders is also beneficial. It is advisable to consult with a mortgage lender early in the process to understand their specific requirements and how they will factor in your student loans. This proactive step can help identify potential issues and allow time to address them.

Maintaining a strong credit score is important. Pay all bills on time and keep credit utilization low. Regularly check credit reports for errors. Saving for a larger down payment can also strengthen your application by reducing the loan amount and potentially lowering your monthly mortgage payment, improving your DTI. Considering a co-borrower with a strong financial profile can help, though this involves shared responsibility.

Student Loan Considerations for Different Mortgage Programs

Mortgage programs have distinct guidelines for how student loans are factored into eligibility. Conventional loans, backed by Fannie Mae and Freddie Mac, have specific rules. Fannie Mae generally uses either the actual monthly payment or 1% of the outstanding loan balance if the payment is $0 on the credit report. Freddie Mac typically uses the monthly payment reported on the credit report if it is greater than $0, or 0.5% of the outstanding balance if the payment is $0 due to deferment or forbearance. For both, if the loan has 10 months or less remaining until payoff, it may be excluded from the DTI calculation.

FHA loans, which are popular for their flexible credit and down payment requirements, also have specific student loan guidelines. FHA lenders generally prefer a DTI of 43% or lower, but can be more flexible. For student loans, FHA guidelines require that if the monthly payment is $0 (e.g., due to deferment, forbearance, or income-driven repayment), lenders must use 0.5% of the outstanding loan balance as the monthly payment for DTI calculation. If there is an actual monthly payment, that amount is used.

VA loans, designed for eligible service members and veterans, offer unique benefits and consider student loans somewhat differently. While VA loans typically look for a DTI ratio of no more than 41%, they also consider “residual income,” which is the money remaining after all major debts and living expenses are paid. For student loans, if payments are deferred for at least 12 months beyond the loan closing date, they may not be included in the DTI. Otherwise, VA lenders generally use the greater of the credit report payment or 5% of the outstanding loan balance divided by 12 months.

USDA loans, which support homeownership in eligible rural areas, generally have a maximum DTI of 41%. For student loans, if a fixed monthly payment is reported, that amount is used. However, if loans are deferred, in forbearance, or on an income-based repayment plan, USDA lenders may factor in 0.5% of the outstanding balance, or the current payment if greater.