Does a Parent PLUS Loan Affect Getting a Mortgage?

A Parent PLUS Loan, a federal student loan program, allows parents to borrow funds to help cover their child’s educational expenses. These loans are designed for parents of dependent undergraduate students. A common concern for individuals with these loans is their potential impact on future financial endeavors, particularly applying for a mortgage. Understanding how these loans are assessed by mortgage lenders is important for parents navigating both educational financing and homeownership goals.

Parent PLUS Loans and Credit Reports

Parent PLUS Loans are solely the responsibility of the parent borrower and appear directly on their credit report, not the student’s. The application process involves a hard credit inquiry, which can temporarily cause a small reduction in a credit score. Opening a new account can also slightly decrease the average age of a borrower’s credit accounts, a factor in credit score calculations.

A borrower’s payment history is the most significant factor affecting credit scores, accounting for 35% of a FICO score. Making consistent, on-time payments on a Parent PLUS Loan can contribute positively to a credit score. Conversely, missed payments can significantly harm a credit score.

A payment reported as 30 days late can cause a credit score to drop, with the impact ranging from 17 to 83 points. If payments become 90 or more days delinquent, the negative impact can be substantial, potentially leading to a decline of over 170 points for those with high credit scores. These negative marks can remain on a credit report for up to seven years. While no minimum credit score is required for a Parent PLUS Loan, an adverse credit history, such as delinquencies or defaults, can prevent approval.

Parent PLUS Loan Payments in Debt-to-Income Calculations

The monthly payment obligation from a Parent PLUS Loan is a component in a borrower’s debt-to-income (DTI) ratio. This ratio compares a borrower’s total monthly debt payments to their gross monthly income. Lenders use the DTI ratio to assess a borrower’s capacity to manage additional debt, such as a mortgage.

The monthly payment for a Parent PLUS Loan is added to other recurring monthly debts like credit card minimums and car loans. This total monthly debt is then divided by the borrower’s gross monthly income to determine the DTI percentage. Lenders generally prefer a DTI ratio of 36% or lower for conventional loans, though some may approve loans with a DTI up to 45-50% with compensating factors like strong credit or substantial cash reserves.

For government-backed loans, such as FHA loans, DTI guidelines can be more flexible. FHA loans may allow a back-end DTI ratio, which includes all debt, up to 56.9%, though a preferred limit is often around 43%. Even if a Parent PLUS Loan is in deferment or forbearance, lenders may still include a calculated payment in the DTI ratio. For FHA loans, if the reported payment is $0 or the loan is in deferment, lenders typically calculate 0.5% of the outstanding loan balance as the monthly payment for DTI. Conventional loan guidelines may also use a calculated payment, sometimes 0.5% or 1% of the balance, if a monthly payment is not reported or is $0.

Mortgage Lender Evaluation of Parent PLUS Loans

Mortgage lenders carefully assess Parent PLUS Loans by examining their repayment status and how payments are structured. The specific treatment of these loans depends on whether they are in active repayment, deferment, forbearance, or if the borrower is utilizing an income-driven repayment plan. Lenders generally require documentation such as loan statements, payment history, and proof of any repayment plan.

For Parent PLUS Loans in active repayment, lenders typically use the actual monthly payment reported on the credit report or loan statement for DTI calculations. If the loan is in deferment or forbearance, where payments are temporarily paused, lenders may still require a hypothetical monthly payment to be factored into the DTI. VA loans may exclude deferred student loan payments from DTI calculations if the deferment is expected to last for at least 12 months beyond the mortgage closing date.

Parent PLUS Loan borrowers seeking an income-driven repayment (IDR) plan, such as Income-Contingent Repayment (ICR), must first consolidate their Parent PLUS Loans into a Direct Consolidation Loan. When an IDR plan is in place, some lenders may accept the actual IDR payment amount, even if it is $0, for DTI calculations. If a Parent PLUS Loan enters default, it can lead to severe consequences, including significant damage to the borrower’s credit score, wage garnishment, and the seizure of tax refunds. The overall loan balance, even if the DTI is within acceptable limits, may also be considered by some lenders as part of their comprehensive financial risk assessment.