are deferred student loans counted in dTI

Last Updated on September 8, 2022 by Ngefechukwu Maduka

Student loans are deferred if payment has been postponed for a certain period of time. These loans could be repaid in equal installments over a certain period of time, or with one sum when the period ends. Because these student loans are deferred, they are not counted in DTI (debt-to-income) ratios that determine your eligibility for certain types of new mortgages or car loans. A person who applies for deferred student loans will prove eligibility to receive funding. This is when the applicant agrees that he or she will participate in a government service, paying a stipend as compensation afterwards. The repayment of a deferred student loan can only commence six months after the borrower has ended his or her relationship with the service, by resigning and becoming an independent individual. A loan can be up to $10,000, and since it is a low interest percentage then borrowers should take advantage of this situation if possible.

FHA Deferred Student Loans Requirement And How It Affects DTI

Federal Student Loans Deferred Department of Education Student loan consolidation has been the buzzword for student loans for the past few years and over a million students have already opted to take advantage of one of the government’s consolidation programs. However, there are some misconceptions about these types of loans and whether or not they should be counted in the Feds infamous counter that is being used to determine whether or not a borrower qualifies for Public Service Loan Forgiveness. Deferred student loans are a type of student loan issued by the Department of Education. These loans are not a new phenomenon. They have been around since at least 1986. However, scholarships and grants were eligible for forgiveness under then-existing law if they were awarded due to participation in any form of public service. This was recently removed, thus making it more necessary than ever to consider other options, including a deferred student loan forgiveness program.

Learn about other pieces of information such as; getting a mortgage with student loans in deferment 2021, getting a mortgage with student loans in deferment 2020, conventional student loan guidelines 2021, conventional student loan guidelines 2022, ibr student loans and mortgage 2021 and other related info on our website.

For many consumers, student loans can be as serious an issue as a mortgage or any other long-term debt. That’s why a lot of people wonder: are deferred student loans counted in dti?

In short, yes. Deferred student loans are counted in dti. The reason is that they’re still an outstanding balance that needs to be paid off, which means that it still counts as part of your debt-to-income ratio. This can be frustrating for those who have deferred their loans, but the good news is that there are ways to keep your DTI down while deferring your student loans (we’ll look at this more later).

The first step is understanding what “deferred” actually means.

If you have deferred student loans, they are taken into account when determining whether or not you’re eligible for a mortgage. However, the impact on your debt-to-income (DTI) ratio will depend on how the bank measures your DTI. Some banks will consider the total amount of your loan, while others will only consider the monthly interest.

Different banks have different policies regarding deferred loans and DTI ratios. Bank A may factor in the full loan amount to determine your DTI ratio, while Bank B may only require you to pay interest on the loan. Other lenders may not even consider deferred loans when determining your DTI ratio at all.

In general, deferred loans will be considered a liability in terms of your financial situation. Your lender is evaluating whether or not you’ll be able to afford paying off your mortgage each month based on your monthly income and other expenses. If they see that you already have a large sum of money due to you in terms of student loans, they may feel that it puts you at risk for defaulting on your mortgage payments if anything were to unexpectedly change in your financial situation.

This doesn’t mean that having deferred loans disqualifies you from getting a mortgage; there’s just more legwork involved with getting approved for one.

Student loan guidelines for getting a mortgage

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So you’re paying off student loans, but also eager to purchase a home. The good news is, even with student loans, you can qualify for a mortgage if you meet certain loan requirements, including the maximum debt-to-income (DTI) ratio. Here’s how student loans typically factor into this figure.

Debt-to-income ratio and student loans

Student loan debt is often considered in your DTI ratio, a formula mortgage lenders use to help assess your creditworthiness as a borrower. This ratio is calculated by dividing your monthly debt payments by your monthly gross income, which yields a percentage value that lenders then scrutinize to evaluate your ability to repay a mortgage.

If you have car loan and student loan payments, for instance, a mortgage lender will add those to your proposed mortgage payment, then divide that total by your gross monthly income.

In general, the result shouldn’t exceed 43 percent, but some lenders look for a lower ratio, 36 percent, while others might accept up to 50 percent.

“Maximum DTI ratios are typically set at 43 percent, depending on whether it’s a government-backed loan or not,” explains Leslie Tayne, an attorney in Melville, New York. “That means your monthly debt obligations divided by your monthly income should not exceed 43 percent for best odds of loan approval. Those with higher incomes, lower loan amounts and lower overall debt will have a lower DTI ratio, increasing your odds of loan approval.”

Guidelines by loan type

Fannie MaeMonthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, either 1% of balance or one monthly payment
Freddie MacMonthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, 0.5% of balance
FHAMonthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, either 0.5% of balance or one monthly payment
VAMonthly student loan payment as listed on credit report or student loan statement or 5% of balance divided by 12 months, whichever is higher; if deferred, not included in underwriting
USDAMonthly student loan payment as listed on credit report or student loan statement; if deferred, in forbearance or on IDR plan, either 0.5% of balance or one monthly payment

Conventional mortgage guidelines for student loans

Every mortgage loan type has guidelines when it comes to student loans and your DTI ratio. If you’re applying for a conventional loan — many of which are conforming loans, which means they adhere to Fannie Mae and Freddie Mac standards — you can expect your student loans to be included in your DTI ratio.

Fannie Mae guidelines

If your credit report lists your monthly student loan payment, your mortgage lender can use the amount in the report in the underwriting process, according to Fannie Mae guidelines. If your credit report doesn’t include those payments, or shows the incorrect amount, your lender can factor them into your DTI by reviewing your latest student loan statement instead. Your lender can also use your student loan statement if you’re on an income-driven repayment plan.

“The mortgage lender can obtain documentation to verify that your monthly obligations are $0” in the case of income-based repayment, says Tayne.

What happens if your student loans are in forbearance or deferred? Based on Fannie Mae guidelines, your lender can factor either 1 percent of your remaining student loan balance into your DTI, or one payment based on what’s indicated in your student loan repayment terms.

Freddie Mac guidelines

Freddie Mac’s guidelines for student loans are similar to Fannie Mae’s, save for one key difference: If your loans are in forbearance or deferred, or your payment is otherwise documented as $0, your lender can factor in just 0.5 percent of your student loan balance to calculate your DTI

What if you’re close to paying off your student loans? Both Fannie Mae and Freddie Mac guidelines address this. In general, if you have 10 months or less left on your repayment plan, your lender can opt not to include your student loans in the DTI ratio at all. This might also be the case if your student loans are set to be fully forgiven. In either scenario, you’ll have to prove this through your student loan statements.

mortgage denied due to student loans

FHA mortgage guidelines for student loans

FHA loans also have guidelines regarding student loans and DTI ratio. As is the case with a conventional loan, your student loans will be considered in your debt obligations, and your lender will derive the monthly payment amount from your credit report or student loan statement.

“FHA lenders prefer a 43 percent or lower DTI ratio, but they can be more flexible if you have extra cash reserves and higher credit scores,” notes Tayne.

However, if your loans are in forbearance or deferred, or you’re on an income-driven repayment plan, your mortgage lender is required to factor in either: 0.5 percent of the remaining balance of your student loans if your current monthly payment is $0; the monthly payment listed on your credit report; or the actual payment as indicated on your student loan statement.

VA mortgage guidelines for student loans

If you’re an active member of the military, veteran, surviving spouse or other qualifying borrower, you might be thinking about getting a VA loan. With a VA loan, the guidelines for student loans are somewhat different than those for other types of mortgages.

First, VA loan lenders typically look for a DTI ratio of no more than 41 percent. However, VA loans don’t call for including student loan payments in your DTI ratio if those payments are to be deferred at least 12 months after the date your VA loan closes.

On the other hand, if you’re currently making student loan payments or expect to be within 12 months of your closing date, your mortgage lender is required to do some math to come up with an estimated payment. This formula is 5 percent of your remaining student loan balance divided by 12 months.

If your student loan payment is actually higher than that, then that’s what needs to be used, according to Donny Schulze, a mortgage banker with Embrace Home Loans in Hauppauge, New York. If your student loan payment is lower, “the VA loan lender can use the actual payment — so long as they document the loan terms from your student loan lender,” says Schulze.

USDA mortgage guidelines for student loans

If you’re considering a USDA home loan and have student loans to repay, there are also guidelines to consider.

Generally, lenders look for a DTI ratio of 41 percent with a USDA loan, but it can exceed that in some circumstances. If you’re making fixed monthly payments on your student loans, your mortgage lender will consider what’s on your credit report or student loan statement for your DTI ratio.

If your student loans are deferred, in forbearance or you’re on an income-based repayment plan, however, your lender is required to factor in 0.5 percent of your remaining student loan balance, or whatever the current payment is within your repayment plan.

conventional student loan guidelines 2022

How to get a mortgage when you have student loans

Knowing how your student loans can impact your mortgage options is important, but keep in mind your DTI ratio is just one element in the underwriting process, and there are often compensating factors, such as credit score, that lenders use to determine if you qualify for a loan.

If you have student loans and want to improve your chances of being approved for a mortgage, here are some tips:

  • Switch to an income-driven repayment plan. “This can help lower your DTI ratio and increase your odds of getting approved,” says Tayne. “It’s a good idea to make this switch at least a year before applying for a mortgage loan.”
  • Shop around and choose a reputable lender who can help you get preapproved. “An experienced loan officer can discuss your student loan situation with you and offer financing programs best structured to meet your budget goals,” says Schulze.
  • Consider adding a co-borrower to the loan. “Additional income always helps with qualification,” explains Juan Carlos Cruz, founder of Britewater Financial Group, based in Brooklyn, New York. “This is an easy way to reduce your DTI ratio — but be sure your co-borrower has little to no debt and a high credit score.”
  • Widen your options. Consider buying a less-expensive or smaller home, or possibly in a more affordable area.
  • Wait things out. “Save up for a larger down payment, reduce your debt and allow any negative information on your credit report to age, which can bolster the likelihood of you getting approved,” suggests Tayne.

Mortgage options for homebuyers with student loans

If you have student loans, there are multiple mortgage programs you might qualify for.

  • Fannie Mae HomeReady loan – A low-down payment option for lower-income borrowers, with cancellable mortgage insurance
  • Freddie Mac Home Possible loan – A similar low-down payment option for lower-income borrowers, with the flexibility to apply sweat equity toward the down payment or closing costs
  • FHA loan – Backed by the Federal Housing Administration (FHA) and requires a down payment of just 3.5 percent
  • VA loan – For active-duty and veterans, with no down payment or mortgage insurance required
  • USDA loan – For borrowers in so-called “rural” areas; you can check eligibility through the USDA website

getting a mortgage with student loans in deferment 2022

A bungalow-style home in Portland, Oregon

So you’re paying off student loans, but also eager to purchase a home. The good news is, even with student loans, you can qualify for a mortgage if you meet certain loan requirements, including the maximum debt-to-income (DTI) ratio. Here’s how student loans typically factor into this figure.

Debt-to-income ratio and student loans

Student loan debt is often considered in your DTI ratio, a formula mortgage lenders use to help assess your creditworthiness as a borrower. This ratio is calculated by dividing your monthly debt payments by your monthly gross income, which yields a percentage value that lenders then scrutinize to evaluate your ability to repay a mortgage.

If you have car loan and student loan payments, for instance, a mortgage lender will add those to your proposed mortgage payment, then divide that total by your gross monthly income.

In general, the result shouldn’t exceed 43 percent, but some lenders look for a lower ratio, 36 percent, while others might accept up to 50 percent.

“Maximum DTI ratios are typically set at 43 percent, depending on whether it’s a government-backed loan or not,” explains Leslie Tayne, an attorney in Melville, New York. “That means your monthly debt obligations divided by your monthly income should not exceed 43 percent for best odds of loan approval. Those with higher incomes, lower loan amounts and lower overall debt will have a lower DTI ratio, increasing your odds of loan approval.”

Guidelines by loan type

Fannie MaeMonthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, either 1% of balance or one monthly payment
Freddie MacMonthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, 0.5% of balance
FHAMonthly student loan payment as listed on credit report or student loan statement; if deferred or in forbearance, either 0.5% of balance or one monthly payment
VAMonthly student loan payment as listed on credit report or student loan statement or 5% of balance divided by 12 months, whichever is higher; if deferred, not included in underwriting
USDAMonthly student loan payment as listed on credit report or student loan statement; if deferred, in forbearance or on IDR plan, either 0.5% of balance or one monthly payment

conventional mortgage student loan guidelines

Every mortgage loan type has guidelines when it comes to student loans and your DTI ratio. If you’re applying for a conventional loan — many of which are conforming loans, which means they adhere to Fannie Mae and Freddie Mac standards — you can expect your student loans to be included in your DTI ratio.

Fannie Mae guidelines

If your credit report lists your monthly student loan payment, your mortgage lender can use the amount in the report in the underwriting process, according to Fannie Mae guidelines. If your credit report doesn’t include those payments, or shows the incorrect amount, your lender can factor them into your DTI by reviewing your latest student loan statement instead. Your lender can also use your student loan statement if you’re on an income-driven repayment plan.

“The mortgage lender can obtain documentation to verify that your monthly obligations are $0” in the case of income-based repayment, says Tayne.

What happens if your student loans are in forbearance or deferred? Based on Fannie Mae guidelines, your lender can factor either 1 percent of your remaining student loan balance into your DTI, or one payment based on what’s indicated in your student loan repayment terms.

Freddie Mac guidelines

Freddie Mac’s guidelines for student loans are similar to Fannie Mae’s, save for one key difference: If your loans are in forbearance or deferred, or your payment is otherwise documented as $0, your lender can factor in just 0.5 percent of your student loan balance to calculate your DTI.

What if you’re close to paying off your student loans? Both Fannie Mae and Freddie Mac guidelines address this. In general, if you have 10 months or less left on your repayment plan, your lender can opt not to include your student loans in the DTI ratio at all. This might also be the case if your student loans are set to be fully forgiven. In either scenario, you’ll have to prove this through your student loan statements.

FHA mortgage guidelines for student loans

FHA loans also have guidelines regarding student loans and DTI ratio. As is the case with a conventional loan, your student loans will be considered in your debt obligations, and your lender will derive the monthly payment amount from your credit report or student loan statement.

“FHA lenders prefer a 43 percent or lower DTI ratio, but they can be more flexible if you have extra cash reserves and higher credit scores,” notes Tayne.

However, if your loans are in forbearance or deferred, or you’re on an income-driven repayment plan, your mortgage lender is required to factor in either: 0.5 percent of the remaining balance of your student loans if your current monthly payment is $0; the monthly payment listed on your credit report; or the actual payment as indicated on your student loan statement.

VA mortgage guidelines for student loans

If you’re an active member of the military, veteran, surviving spouse or other qualifying borrower, you might be thinking about getting a VA loan. With a VA loan, the guidelines for student loans are somewhat different than those for other types of mortgages.

First, VA loan lenders typically look for a DTI ratio of no more than 41 percent. However, VA loans don’t call for including student loan payments in your DTI ratio if those payments are to be deferred at least 12 months after the date your VA loan closes.

On the other hand, if you’re currently making student loan payments or expect to be within 12 months of your closing date, your mortgage lender is required to do some math to come up with an estimated payment. This formula is 5 percent of your remaining student loan balance divided by 12 months.

If your student loan payment is actually higher than that, then that’s what needs to be used, according to Donny Schulze, a mortgage banker with Embrace Home Loans in Hauppauge, New York. If your student loan payment is lower, “the VA loan lender can use the actual payment — so long as they document the loan terms from your student loan lender,” says Schulze.

USDA mortgage guidelines for student loans

If you’re considering a USDA home loan and have student loans to repay, there are also guidelines to consider.

Generally, lenders look for a DTI ratio of 41 percent with a USDA loan, but it can exceed that in some circumstances. If you’re making fixed monthly payments on your student loans, your mortgage lender will consider what’s on your credit report or student loan statement for your DTI ratio.

If your student loans are deferred, in forbearance or you’re on an income-based repayment plan, however, your lender is required to factor in 0.5 percent of your remaining student loan balance, or whatever the current payment is within your repayment plan.

How to get a mortgage when you have student loans

Knowing how your student loans can impact your mortgage options is important, but keep in mind your DTI ratio is just one element in the underwriting process, and there are often compensating factors, such as credit score, that lenders use to determine if you qualify for a loan.

If you have student loans and want to improve your chances of being approved for a mortgage, here are some tips:

  • Switch to an income-driven repayment plan. “This can help lower your DTI ratio and increase your odds of getting approved,” says Tayne. “It’s a good idea to make this switch at least a year before applying for a mortgage loan.”
  • Shop around and choose a reputable lender who can help you get preapproved. “An experienced loan officer can discuss your student loan situation with you and offer financing programs best structured to meet your budget goals,” says Schulze.
  • Consider adding a co-borrower to the loan. “Additional income always helps with qualification,” explains Juan Carlos Cruz, founder of Britewater Financial Group, based in Brooklyn, New York. “This is an easy way to reduce your DTI ratio — but be sure your co-borrower has little to no debt and a high credit score.”
  • Widen your options. Consider buying a less-expensive or smaller home, or possibly in a more affordable area.
  • Wait things out. “Save up for a larger down payment, reduce your debt and allow any negative information on your credit report to age, which can bolster the likelihood of you getting approved,” suggests Tayne.

Mortgage options for homebuyers with student loans

If you have student loans, there are multiple mortgage programs you might qualify for.

  • Fannie Mae HomeReady loan – A low-down payment option for lower-income borrowers, with cancellable mortgage insurance
  • Freddie Mac Home Possible loan – A similar low-down payment option for lower-income borrowers, with the flexibility to apply sweat equity toward the down payment or closing costs
  • FHA loan – Backed by the Federal Housing Administration (FHA) and requires a down payment of just 3.5 percent
  • VA loan – For active-duty and veterans, with no down payment or mortgage insurance required
  • USDA loan – For borrowers in so-called “rural” areas; you can check eligibility through the USDA website

ibr student loans and mortgage 2021

IBR Student loan payments home loan guidelines

Getting a Mortgage with IBR Student Loans

Qualifying for a mortgage when you have income-based repayment (IBR) student loans can put you on quite a roller coaster.  The underwriting guidelines have changed several times over the years, and have left many lenders unable to keep up.

How Do IBR Student Loans Affect My Ability To Get A Mortgage To Buy A Home?

Your IBR Student Loan repayments are considered as part of the debt you owe which is one of the elements underwriters use to determine whether to approve your mortgage application or not. 

The loan payments you owe are part of your debt-to-income ratio (DTI) which adds up all your debt payments due each month and divides them by your monthly earnings. If that ratio is too high, your loan will usually be denied. 

Complete Guide to Qualifying for a Mortgage with Student Loans

The challenge with IBR loans in the process of calculating your debt-to-income ratio is that:

  • Required IBR loan payments change each year based on your income and family size
  • Each type of loan (VA/FHA/USDA) has its own policies about how to determine what amount you should be repaid on your IBR-based student loan each month. They’re struggling with the issue of how much should you be expected to pay each month (i.e. how much that payment should be included in your debt-to-income ratio) across the life of your 30-year mortgage when your IBR payments could be different every year, and in fact, they could literally be zero some years if your income is low enough.

Here are the latest decisions made by the loan agencies as to how they will calculate IBR loans as part of the loan qualification process.

Get Introduced to a Student Loan Mortgage Expert Now

After the most recent update, here are the loan programs that will allow you to use income-based payments:

  • Fannie Mae Conventional Mortgage – Allows IBR payment.  Fannie Mae student loan guidelines state that you must document repayment status with the credit report or loan statement. IBR payment can be $0.00
  • Freddie Mac Conventional Mortgage – Allows IBR payment. Freddie Mac guidelines state that you must document repayment status with the credit report or loan statement.  IBR payment must exceed $1.00
  • FHA Mortgage – Allows IBR Payment.  FHA student loan guidelines state that you must document repayment status with the credit report.  IBR payment must exceed $1.00 – Updated 8/2021
  • VA Mortgage – Allows IBR Payment.  VA student loan guidelines state that you must document repayment status with the credit report or loan statement. Payment must be fully amortized or calculate the balance by 5%, divided by 12.
  • USDA Mortgage – No IBR payment. USDA student loan guidelines state that payment must be fully amortized or use 1% of the balance as a qualifying payment.

Loan officers that have been unable to keep up with these guidelines will most often quote the 1% of the balance calculation when qualifying a home buyer.

Complete Guide to Qualifying for a Mortgage with Student Loans

As you can see by scrolling through the hundreds of questions and answers below, there is a lot of misinformation out there about this topic.

Article Originally Published March 16th, 2016 with updates (indicated below)

We’ve been following this issue since the beginning.

As more Millennials are looking to buy their first home, many are faced with the challenge of student loan debt and how lenders calculate payments when determining debt to income ratios.

Unlike other types of debt that include monthly payments of principal and interest, student loans often have reduced or deferred payments that do not include principal repayment.

Get Introduced to a Student Loan Mortgage Expert Now

Specifically, Income-Based Repayment (IBR) plans limit your federal student loan payments to a percentage of your income. These plans can go a long way towards making payments manageable for young professionals just entering the workforce at entry level salaries. For those with very low income, payments can be as little as $0.

This is where things get interesting for mortgage lenders seeking to make sound underwriting decisions. Should they calculate debt to income ratios using the payment set under the IBR plan?

Or, since the payments must eventually rise if the loan is ever to be paid off, should they use some type of proxy for a fully amortizing payment?

Complete Guide to Qualifying for a Mortgage with Student Loans

The answer depends on the type of mortgage you are applying for. Since the vast majority of borrowers with IBR student loan debt aren’t looking at Jumbo loans, we’re going to focus on the different ways Fannie Mae, Freddie Mac, FHA, VA, and USDA answer this question.

If you love details, you can read the entire guideline in italics. If you like to get right to the point, skip to the BOTTOM LINE in bold.

IBR Using a Conventional Fannie Mae Loan

UPDATED April 25th, 2017 – Fannie Mae has recently updated its guidelines to allow borrowers to use the payment that appears on your credit report.  That can be an IBR, PAYE, or REPAYE payment that does not pay off your loan at the end of the term.

Get Introduced to a Student Loan Mortgage Expert Now

If no payment is reported on the Credit Report, the lender must use one of the options below to determine the repayment amount:

  • 1% of the outstanding balance;
  • the actual payment that will fully amortize the loan(s) as documented in the credit report, by the student loan lender, or in documentation supplied by the borrower:
  • a calculated payment that will fully amortize the loan(s) based on the documented loan repayment terms: or
  • if the repayment terms are unknown, a calculated payment that will fully amortize the loan(s) based on the current prevailing student loan interest rate and the allowable repayment period shown in the table below.

The current prevailing student loan interest rate’ can be found on a variety of websites. For example. see U.S. Department of Education Federal Student Aid in E-1-03. List of Contacts.

The following table specifies the repayment period to be used when calculating a fully amortizing payment.

Calculating a Student Loan Repayment
Total outstanding balance of all student loansRepayment Period
$1— $7,49910 years
$7,500 — $9,99912 years
$10,000 — $19,99915 years
$20,000 —$39,99920 years
$40,000 — $59,99925 years
$60,000 +30 years

Note: The lender is responsible for determining that the payment on the credit report or other documents provided by the student loan lender or borrower are fully amortizing payments.
Example: Calculating an Amortizing

Payment Balance: $17,500
Repayment period: 15 years
Interest rate: 4.29%
Monthly Amortizing Payment: $132.00

BOTTOM LINE:  Use the actual amortizing payment. If you are unable to document the actual amortizing payment, use the calculated payment using the method above as it will nearly ALWAYS be less than 1% of the balance. If ALL ELSE FAILS, use 1% of the outstanding balance.

IBR Using a Conventional Freddie Mac Loan

Here is the section from Freddie Mac’s underwriting requirements for student loans that applies to IBR loans:

When a monthly payment on an installment debt is not reported on the credit report or is listed as deferred, the Seller must obtain documentation verifying the monthly payment amount included in the monthly debt payment-to-income ratio.

If no monthly payment is reported on a student loan that is deferred or is in forbearance, and there is no documentation in the Mortgage file indicating the proposed monthly payment amount (e.g., the loan verification letter), 1% of the outstanding balance will be considered to be the monthly amount for qualifying purposes.

Examples of documentation of the required payment amount include:

  • A direct verification obtained from the creditor
  • A copy of the installment loan agreement obtained from the Borrower, or
  • If payments are currently deferred, the payment amount that will be required once the deferment or forbearance period has ended, as stated in a copy of a financial institution’s student loan certification or the installment loan agreement

While the Freddie Mac seller guide has not changed since the publishing of this article, we have spoken directly to Freddie Mac and received confirmation that they will in fact use the IBR payment when calculating debt to income ratios.

BOTTOM LINE:  Use the documented IBR payment as long as it is greater than zero. For any loans with no payment, including IBR loans, the lender must fall back to the forbearance guidelines and use 1% of the outstanding balance unless you are able to provide documentation verifying the proposed monthly payments will be less than 1%.

IBR Using a Government FHA Loan – Updated June, 2021

Here is the section from FHA’s underwriting requirements for student loans that applies to IBR loans:

FHA 4000.1 Section II. A. 4. B. (H)

(4) Calculation of Monthly Obligation For outstanding Student Loans, regardless of payment status, the Mortgagee must use:

  • the payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero; or
  • 0.5 percent of the outstanding loan balance, when the monthly payment reported on the Borrower’s credit report is zero.

BOTTOM LINE:  As of June 2021, FHA is following Freddie Mac’s IBR student loan payment calculation guidelines.

IBR Using a Government VA Loan

Here is the section from the VA’s underwriting requirements for student loans that applies to IBR loans:

Student Loans (5/1/2017)

  • Deferred Student Loans: If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis.  If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.
  • Student loans in Repayment:

If a student loan is in repayment or scheduled to begin within 12 months from the date of a VA loan closing, you must consider the anticipated monthly obligation in the loan analysis.

The anticipated monthly obligation should use the greater of:

Calculated payment at a rate of 5% of the outstanding balance divided by 12 months (example:  $25,000 student loan balance x 5% = $1,250 divided by 12 months = $104.17); or the payment reported on credit report

Standard Repayment Plan: The required monthly payment is to be used for qualification purposes.

If a monthly payment is not reflected on the credit report or there is a need for the payment amount required for qualification purposes, documentation, as evidenced by a letter from the creditor or repayment schedule, is required to verify monthly payment.

BOTTOM LINE: Use the above formula to calculate any payments that are not in repayment.

IBR Using a Government USDA Loan

If the borrower has a student loan with income-based repayment, you must use 1% of the balance. Below you will find the guideline directly from the USDA underwriting manual:

USDA Guaranteed Loan – Updated September 2019

  • Non-amortized Payment – Use payment on credit report 0r .50%, whichever is greater.
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use .50% of the loan balance

WHAT DOES IT ALL MEAN?

VA and USDA loans are both limited. Unless you are a veteran or buying in a “rural” area as defined by the USDA, these loans aren’t an option. If they are, the good news is both have straightforward, borrower-friendly treatment of IBR plans.

For most people, the question will come down to which programs you qualify for and then which offers the most favorable income-based repayment calculation. If you need to use FHA due to lower credit scores or higher debt to income ratios, things just got a lot tougher.

After offering guidance earlier this year allowing the use of IBR payments, the current guidelines require documentation of the actual amortizing payment or 1% of the outstanding balance will be used. In either case, the payment used for qualifying will be higher than the current IBR payment.

If your loan balance is relatively large, this treatment will likely erase much, if not all, of the benefit of FHA’s higher debt to income ratios.

If you are able to qualify using Fannie Mae or Freddie Mac programs, you have a good bit more flexibility. In most cases, a borrower that can be approved through Fannie Mae’s automated underwriting system (AUS) will also be approved through Freddie Mac’s AUS.

This is great news if you have an IBR payment that is greater than zero. Freddie will use the IBR payment reported on the credit report so you should be home free.

If you are working with a lender that ONLY offers loans underwritten to Fannie Mae guidelines OR you have an IBR payment of $0, Fannie has an option that will not be as bad as using 1% of the balance.

Let’s look at an actual scenario for a borrower I’m working with right now.

She’s looking to buy a home for $350,000. Her income is just over $72,000 per year. She just went through the annual review on her IBR plan and for the next 12 months she pays $146 a month on roughly $117,000 of student loan debt. If you’ve been paying attention up to this point, you see where this is going.

Since she has good credit and her debt to income ratios are under 45% using the IBR payment, we’re in luck. We can use Freddie Mac guidelines and pull the $146/month from the credit report and she’s good to go.

WHAT IF, her IBR payment had been set at zero? In that case, we could look at going FHA. Under current guidelines we simply use 1% of the $117,000 loan balance as the monthly payment. The bad news is this pushes us over the maximum FHA debt to income ratio of 56.9%. That doesn’t work so let’s move on to Fannie Mae.

Assuming her lender would not give us documentation of a fully amortizing payment AND her loan documentation doesn’t provide enough information for us to calculate the amortizing payment, we have to use the calculated method using the ‘current prevailing student loan interest rate’.

Using the chart above we see that we use a 30 year term and the current prevailing interest rate is 4.29%. That leaves us with a monthly payment of $578. Even though the calculated payment is much higher than the actual IBR payment, we can keep the debt to income ratio just under the maximum 45% and approve the loan.

The bottom line is, “it’s complicated.” But there are options and if you’re working with an experienced loan officer who understands the intricacies of student loan qualifying guidelines, there should be an option for you. As always, we’re here to help. If you have any questions, or specific scenarios reach out directly or in the comments section below.


Frequently Asked Questions

What Are IBR Student Loans (Income-Based Repayment Student Loans)?

Income-Based Repayment (IBR) Student Loans reevaluate how much you owe in monthly student loan payments based on your income and family size. These amounts are reviewed annually, and a new required monthly payment amount is set for the next year. This is different from normal student loans that have a set payment amount each month, regardless of your actual ability to pay that loan. 

How Do I Qualify For Income-Based Repayment On My Student Loans?

If you are a federal student loan borrower struggling to make ends meet, an Income-Driven Repayment (IDR) plan may be the right solution for you. You can either apply online, use a Student Loan Counseling Service, or contact your loan service provider to discuss whether you may qualify and what option would be best for you. Whether you meet the IBR qualifications or not will depend on a number of factors:

  • The type of loan you have
  • Whether you have ever defaulted on your loan (defaulted loans are not eligible)
  • Your income level
  • The size of your family
  • The average income in your geographic area
  • Whether you borrowed before 2014 or not (loans prior to 2014 have a higher required repayment)
  • Whether you are a student or parent borrower (parent PLUS Loan borrowers are not eligible)

Will An Income-Based Repayment Plan Affect My Ability To Qualify For A Mortgage?

Probably yes, depending on your specific situation. Though they won’t prevent your qualification for a mortgage, they will affect your ability to qualify. If you are considering whether you should participate in an IBR program or not, you may want to consider your potential and plans to purchase a home in the future. 

What Do FHA Student Loan Guidelines Say About IBR Student Loans?

FHA mortgage guidelines currently do not allow for IBR payments.  FHA student loan guidelines state that payment must be fully amortized or use 1% of the balance as a qualifying payment.

Do Student Loans Count In Debt-To-Income Ratio When Applying For A Mortgage?

Yes, they do. The challenge is that different types of loans (FHA, VA, USDA, etc.) account for them differently if they are IBR Student Loans. You can read the specific requirements above or Contact Us for more information if you are considering buying a home soon.

conventional student loan guidelines 2022

Understanding Student Loans and Mortgage Approval

U.S. borrowers collectively carry about $1.7 trillion in student loan debt, according to Federal Reserve data. If you fall into this category and want to buy a home, it’s important to first understand the relationship between student loans and mortgage approval.

With the typical student loan borrower carrying a balance of more than $30,000, qualifying for homeownership can be a major hurdle to clear, but it’s not impossible.

  • Your debt-to-income ratio and student loans
  • How student loans are factored into your mortgage application
  • How to juggle repaying student loans and buying a house
  • 5 mortgage options for homebuyers with student loan debt

Your debt-to-income ratio and student loans

Your credit score is just one of the major factors that determine whether you qualify for a mortgage. Another important number is your debt-to-income (DTI) ratio.

Your DTI ratio is the percentage of your gross monthly income that is dedicated to paying your monthly debt obligations. This includes:

  • Auto loans
  • Credit cards
  • Mortgage or rent
  • Personal loans
  • Student loans

When you’re buying a house with student loans or any other type of debt, the more debt you pay each month relative to your income, the harder it will be to qualify for a mortgage. It’s best to keep your DTI ratio at a maximum 43% to strengthen your chances of mortgage approval.

Before you start the mortgage application process, it’s best to pull your credit report to verify how your student loan debt is being reported and dispute any errors that come up. You can get copies of your credit report from all three major bureaus — Equifax, Experian and TransUnion — from AnnualCreditReport.com.

If your student loan repayment period recently began, there should be a minimum monthly payment on your credit report. If the credit report doesn’t correctly reflect that payment amount, contact each bureau reporting the inaccurate information to have it corrected, and provide them with the actual payment schedule you received from your student loan servicer.

How student loans are factored into your mortgage application

A major consideration for student loans and mortgage approval is how you’re managing your loan repayment responsibilities. This includes whether you’re participating in a special repayment plan or have your payments paused altogether.

Here’s how different loan programs evaluate borrowers who are interested in buying a home with student loan debt.

Conventional loans

Conventional loans are mortgages that aren’t backed or insured by the federal government. You typically need a 620 credit score and 3% down payment to qualify for a conventional loan. Lenders often prefer a maximum 45% DTI ratio, but may accept up to a 50% DTI ratio if you have a higher credit score and more cash savings.

Conventional lenders will rely on the monthly payment amount shown on your credit report or loan documentation when qualifying you for a home loan.

However, if you’re on an income-driven repayment (IDR) plan and your monthly payment is $0, Fannie Mae student loan guidelines instruct lenders to accept this amount with documentation. Freddie Mac lenders will use 0.5% of your outstanding student loan balance to calculate a monthly payment amount for your mortgage application. If you owe $40,000, for example, your hypothetical payment would be $200.

For student loans in deferment or forbearance, Fannie Mae may use 1% of your outstanding balance to calculate a payment. Freddie Mac’s 0.5% calculation also applies to these payment statuses.

FHA loans

Home loans backed by the Federal Housing Administration (FHA) have looser borrowing requirements than conventional loans. You can qualify for an FHA loan with a minimum 3.5% down payment and at least a 580 credit score.

FHA lenders prefer to see a maximum 43% DTI ratio but may allow a slightly higher ratio for borrowers with higher credit scores and additional cash reserves.

FHA student loan guidelines don’t focus as much on the type of repayment plan in which you’re participating; your lender will likely use 1% of your outstanding loan balance to calculate a monthly payment for your mortgage application. If the monthly payment shown on your credit report is higher than 1% of your balance, your lender will use that amount instead.

VA loans

The U.S. Department of Veterans Affairs (VA) insures VA loans for military service members, veterans and eligible spouses. There is usually no down payment required, though there is a funding fee to offset the loan program cost to taxpayers. Most VA lenders require a minimum 620 credit score and a maximum 41% DTI ratio but may provide flexibility under certain circumstances.

VA lenders have slightly different guidelines to follow for those buying a house with student loan debt. If a borrower’s student loans will be in deferment for a year or more, no monthly payment is counted toward qualifying for a mortgage. However, if their repayment plan will begin within the next 12 months, the lender must use 5% of the outstanding student loan balance and divide it by 12 to calculate a monthly payment amount.

For example, if you have a $75,000 student loan balance, you’d take 5% of that ($3,750) and divide it by 12 to get a monthly payment of $312.50 for qualifying. If the student loan payment listed on the borrower’s credit report is higher than the 5% calculation, the lender must use that payment amount instead. If it’s lower, the borrower must provide supporting documentation.

USDA loans

The U.S. Department of Agriculture (USDA) insures USDA loans to help low- and moderate-income borrowers buy homes in designated rural areas of the country. No down payment is required, though there are income limits. If you already meet employment and income requirements, you may receive automatic approval with a minimum 640 credit score.

USDA lenders may use the monthly student loan payment shown on a borrower’s credit report or on documentation from their student loan servicer. However, lenders may use a 0.5% monthly payment calculation for loans on an IDR plan or in deferment.

How to juggle repaying student loans and buying a house

Now that you’re clear on how student loans impact mortgage approval, keep the following tips in mind before you start the application process:

LOWER YOUR DTI RATIO. A high debt-to-income ratio indicates to lenders that you’re a risky borrower who is more likely to fall behind on debt payments, and it can disqualify you from getting a mortgage. Lower your DTI ratio by paying down your student loan, credit card and any other outstanding balances you have. Consider a temporary side gig to increase your monthly income and pay down debt faster.

BOOST YOUR CREDIT SCORE. The higher your credit score, the more creditworthy lenders are likely to perceive you. Review your credit reports and dispute any errors you find, such as an incorrectly reported late payment or an unfamiliar medical bill in collections. Additionally, always pay your bills on time.

CONSIDER A STUDENT LOAN REFINANCE. A student loan refinance can help you snag a lower interest rate and stretch out your repayment term to reduce your monthly payment amounts. The drawback here if you have federal student loans is that you’ll lose important protections, such as income-driven repayment plan options.

5 mortgage options for homebuyers with student loan debt

  1. Fannie Mae HomeReady® loan. A HomeReady loan is ideal if you have a good credit score, but limited down payment funds. To qualify with the minimum 3% down payment, you’d need a maximum 45% DTI ratio and a minimum 720 score.
  2. Freddie Mac Home Possible® loan. Home Possible loans also require a minimum 3% down payment. You’ll need a minimum 660 credit score and a maximum 45% DTI ratio.
  3. FHA loan. The lowest credit score FHA lenders may accept is 500, though you’ll need a 10% down payment. As mentioned above, if you have a minimum 580 score, you’ll only need to contribute a 3.5% down payment.
  4. USDA loan. If you prefer to buy a home in a rural area, you may qualify for a USDA loan. You’ll need to meet income eligibility limits, but you won’t have a minimum down payment requirement.
  5. VA loan. If you’re a member of the military, veteran or eligible spouse, consider a 0% down VA loan. If your DTI exceeds the 41% maximum, it helps to have enough income left over after your monthly expenses to qualify for a loan.

If you need help coming up with the funds to buy a home, consider a down payment assistance program to help supplement what you’ve saved toward your home purchase.