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Understanding Student Loans and Mortgage Approval

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Student loan debt can make it harder — but not impossible — for you to get a mortgage. Lenders consider student loan debt as a part of your total debt-to-income (DTI) ratio, which is a vital indicator of whether you’ll be able to make your future mortgage payments. Here’s what to know about getting a mortgage with student loans.

Your ideal DTI ratio is lower than 35%

Your DTI gives the strongest indication of your ability to repay a mortgage. The lower your DTI, the better your chances of approval and of getting a low interest rate.

DTI ratioHow lenders view it
35% and lowerGood: You likely have the financial ability to take on another debt payment
36% to 49%OK: You may struggle to afford your bills if you add another debt payment
50% and higherPoor: You likely can't afford another debt payment

What to include in your DTI math

There are two types of DTI ratios — back end and front end. Your back-end DTI ratio includes payments you make on all of your loan obligations, including your credit cards, housing payment and auto loan, as well as any other legally obligated payments, such as alimony and child support. Mortgage lenders focus on your back-end DTI.

The front-end DTI ratio provides a less complete picture of your finances. It only includes the ratio of your housing payment to your income.

How to include student loans in your DTI math

There are a few ways to account for your student loan payment. Most lenders will use the payment that’s reported on your credit report. If your credit report doesn’t show a payment, some lenders will do some math using your outstanding loan balance. See the table below for specifics.

Exceptions: When your student loan debt isn’t a barrier

  • When you take out a physician loan: It may be easier to get a mortgage loan if your student debt helped you to become a medical doctor, dentist or veterinarian. Physician loans typically allow 100% financing and don’t require private mortgage insurance (PMI).
  • When others pay your student loan debt: If you can prove that another person paid your entire student loan payment(s) for the most recent 12 months and there isn’t a history of delinquent payments, then your student loan debt won’t be included in your DTI calculation.
  • When your loan has been forgiven, canceled, discharged or paid in full: If you can show that you no longer have to pay your student loans at all, they can be excluded from your DTI ratio.  Note that this exception doesn’t apply to U.S. Department of Agriculture (USDA) loans.
  • When your payments are deferred: If your student loan payments are deferred for at least 12 months beyond your mortgage closing date and you’re applying for a VA loan, you may be able to exclude them.

Different mortgage types have different student loan guidelines

As you look at getting a mortgage while you have student debt, consider the different types of mortgages available. Each has its own guidelines.

Loan typeBack-end DTI ratio allowedHow the lender calculates your monthly payment
Conventional45%Your actual documented payment, your fully amortizing payment or 1% of your outstanding loan balance divided by 12 months
FHA43% with exceptions above 50%Your actual documented payment or 0.5% of your outstanding loan balance divided by 12 months
VA41%5% of your outstanding loan balance divided by 12 months or, if it’s higher, the monthly payment shown on your credit report
USDA41%Your actual documented payment or 0.5% of your outstanding loan balance divided by 12 months

Example

The U.S. Department of Veterans Affairs (VA) provided this example of how to calculate a student loan payment for DTI purposes:

Student loan balance$25,000
Student loan balance$25,000
Multiply the balance by 5% $25,000 x 5% = $1,250
Divide by 12 months$1,250 ÷ 12 = $104.17

You can improve your DTI

You could improve your DTI ratio in several ways: By focusing on lowering your debt, increasing your income or both.

How to lower your debt

When you want to lower your debt to improve your DTI ratio, you’ll focus on reducing your debt payments rather than your entire outstanding debt principal amount.

This means you should put your efforts into paying off your loans that have the highest payments, rather than your loans with the largest principal balances or highest interest rates. This can seem counterintuitive, and for a good reason — it’s typically smart to attack high-rate debt.

Here are ways you could potentially lower your payment(s) and your APR(s):

How to raise your income

On the other side of the equation, you could increase your income. Possibilities include:

Assistance programs are available

You’re not alone when you’re looking to buy a home. There are assistance programs available at national, state and local levels.

The Consumer Financial Protection Bureau (CFPB) also has a special loan programs tool that allows you to look up programs in your area.

 

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