Mortgage Qualification With Student Loans: Current Rules

Nearly 45 million Americans have student debt. Thankfully, it's becoming easier for homebuyers to obtain a mortgage with student loans. Recent updates to lending guidelines mean that you could be "hit with" a lower student loan payment when it comes to mortgage qualification.

Here’s what lenders are required to count as your student loan monthly payment as of mid-to-late 2023.

Getting a Conventional Loan With Student Loans

Conventional loans sponsored by Fannie Mae and Freddie Mac make up the overwhelming majority of mortgages issued. Conventional loans allow you to get a mortgage with student loans with as little as 3% down and a credit score of 620.

Keep in mind that you may not know which rules your lender is using: Fannie Mae or Freddie Mac. But it could mean the difference between qualifying or not, especially with student loans in deferment or Income-based repayment (IBR) plans.

When you apply, ask your lender which rulebook they are using for your loan: Fannie Mae or Freddie Mac. Some lenders have access to one or the other, or both. If your lender can access only one, and you’re denied, try applying with another lender that has access to both platforms.

Payment Used for Qualification Purposes (Fannie Mae)

Student loans currently being paid and with a payment on the credit report: Lenders may use the amount specified on your credit report. If that amount is incorrect, you can submit your most recent student loan statement as proof of the correct amount.

Student loans with no payment on the credit report: Conventional lenders must determine the status of the loan, either deferment, income-based repayment, forbearance, or another status. The lender will then calculate the income according to the guidelines below.

Student loans in deferment or forbearance: Lenders may either calculate a fully-amortized payment based on your loan repayment terms or a monthly payment equal to 1% of your outstanding loan balance. Lenders are allowed to use the 1% calculation even if it’s lower than the actual fully-amortizing payment.

Income-based repayment: If your IBR payment amount is above $0, lenders may use the actual amount specified in your credit report or loan documentation. For IBR plans with no monthly payment, lenders may ignore your student loan payment during DTI calculations and use a $0 payment.

Payment Used for Qualification Purposes (Freddie Mac)

Student loans currently being paid and with a payment on the credit report: Lenders can use the amount specified on your credit report or student loan documentation.

Student loans with no payment on the credit report: Lenders may use the amount reported on your student loan documentation if greater than $0. For $0 payments, your monthly obligation will be calculated as 0.5% of your outstanding loan balance.

Student loans in deferment: The DTI obligation on deferred student loans with no monthly payments will be calculated as 0.5% of your remaining balance.

Income-based repayment: Lenders will use your actual documented payment amount for IBR plans unless your monthly payment is $0. In that situation, your student loans will be calculated, for DTI purposes, as 0.5% of the outstanding balance.

Here are a few other things to know about conventional mortgages and students loans:

1. Freddie Mac allows lenders to ignore student loan payments for self-employed borrowers with documentation that their business has paid their student loans on time for at least the past 12 months.

2. Do you have ten months or fewer of payments until your student loan will be forgiven, canceled, discharged, or paid by an employment-contingent repayment program? Freddie Mac allows lenders to ignore the debt with proper documentation.

3. Fannie Mae does not offer the same leeway, with forgiveness, cancelation, or discharge required as of the loan's closing date. Fannie Mae does, however, allow lenders to ignore student loan payments that have been paid, on time, by a third party for the past twelve months.

Getting an FHA Loan With Student Loans

FHA loans are 3.5% down home mortgages insured by the Federal Housing Administration. They allow borrowers to qualify with a credit score as low as 580. With a 10% down payment, you even qualify with a credit score of 500.

The FHA process for calculating student debt obligation is much more straightforward than conventional loan standards. The guidelines apply to all outstanding student loans, regardless of payment status, and allow fewer exceptions.

Student loans currently being paid and with a payment on the credit report: Lenders may use the amount specified on your credit report. If this number is incorrect, they can accept recent student loan documentation as proof of the correct payment.

Student loans with no payment on the credit report: Lenders can use your actual amount, as per student loan documentation, if the cost exceeds $0.

Student loans in deferment: For deferred loans with a $0 monthly payment, lenders will calculate your monthly debt as 0.5% of the outstanding loan balance.

Income-based repayment: For IBR plans, lenders may use the amount stated on your credit report or loan documentation. If your IBR amount is $0, lenders will use 0.5% of your loan balance as your monthly obligation.

Getting a VA Loan With Student Loans

Available to veterans, active service members, and some surviving spouses, VA loans are secured by the Department of Veterans Affairs and allow qualifying borrowers to purchase a home with 0% down. The VA sets no minimum credit score, with lenders each establishing their own standards.

Although one of the best mortgage options if you qualify, VA loans have a unique method for calculating student loan payments. If you’re applying for a VA mortgage with student loans, the lender will first establish a “threshold payment” by taking 5% of your loan balance and dividing it by 12.

For example: if your student loan has an outstanding balance of $20,000, the lender will determine 5% of the total ($1,000) and divide that number by 12 to establish a threshold payment ($83.33).

While this figure doesn't affect the payment amount you're "hit with," it does determine whether you'll need to submit extra documentation on your student loans.

Student loans currently being paid and with a payment on the credit report: When the amount reported is correct and above the threshold, lenders can use that figure for DTI calculations. If the figure is incorrect or below the threshold payment, lenders must request official documentation stating the loan's terms and monthly amount.

Student loans with no payment on the credit report: Lenders will request your student loan documentation and use the actual amount specified. For monthly payments of $0, lenders will:

• Ignore loans with written proof of deferment lasting more than twelve months past closing.

• Use the anticipated monthly obligation for loans with twelve months or fewer of $0 payments remaining.

Student loans in deferment: VA lenders may ignore loans with written proof that deferment will last more than twelve months past your closing date. Otherwise, your anticipated monthly payment will be used for calculations.

Income-based repayment: Lenders will use your actual payment (if above $0), but you'll likely need to submit loan documentation. If your IBR payment is $0, loans scheduled to restart payments within the next twelve months will be calculated at the anticipated payment amount. In contrast, those with documentation of more than a year of $0 payments remaining can be ignored.

Getting a USDA Loan With Student Loans

USDA loans are designed for buyers purchasing a home in a rural community. Although metropolitan areas don't typically qualify, 91% of the geographic United States falls within the boundaries of USDA loan eligibility. Borrowers with a credit score of 640 (as low as 580 with certain lenders) can get a mortgage with 0% down.

Guidelines for qualifying for a USDA mortgage with student loans are similar to those of FHA loans: straightforward for all student debt, regardless of payment status, with fewer exceptions than conventional loans.

Student loans currently being paid and with a payment on the credit report: Lenders will use the amount specified on your credit report or loan documentation.

Student loans with no payment on the credit report: If your monthly payment is above $0, lenders will use the amount stated on your loan documentation. For payments of $0, lenders will calculate your monthly obligation as 0.5% of the outstanding loan balance.

Student loans in deferment: Lenders will calculate the monthly obligation for student loans in deferment as 0.5% of the remaining loan balance.

Income-based repayment: If your IBR amount is above $0, lenders will use the actual figure on your credit report or student loan documentation. For IBR loans with monthly payments of $0, your obligation, for DTI calculations, will be 0.5% of the outstanding loan balance.

Unlike conventional mortgages following Fannie Mae guidelines, the USDA explicitly states that student loans paid by a third party should still be calculated for DTI purposes. And unlike Freddie Mac, loans with anticipated forgiveness are included in USDA debt calculations unless they're officially forgiven before closing.

Will I Qualify for a Mortgage With Student Loans?

Still unsure how lenders will view your student loan debt or which mortgage type is ideal for you? Your best and easiest option is to apply with a lending professional experienced in helping borrowers with student loans obtain mortgages. They'll use their expertise to guide you toward the mortgage options best suited for your unique student loan situation.