USDA Student Loan Guidelines for Residential Mortgages
The Bottom Line
Having student loans won’t prevent you from qualifying for a USDA mortgage, but they will count toward your debt-to-income ratio, which can affect how large of a loan you are eligible for.
You’re still eligible for a USDA loan despite student loan debt. But they may impact how much home you qualify for.
Can You Get a USDA Mortgage If You Have Student Loan Debt?
Yes, you can still get a USDA mortgage if you have student loan debt, so long as you are current on your required payments. Even loans deferred or in forbearance will not disqualify you from getting a USDA loan.
That's good news because Americans have more than $1.75 trillion in student debt, with around 42.7 million borrowers responsible for repaying federal education loans.
USDA Guidelines for Student Loans
Lenders view student loans just like any other ongoing debt obligation, and simply having outstanding debt does not prevent you from qualifying for a mortgage.
However, the USDA does set a limit on just how much debt you can have relative to your income. Generally speaking, your debt-to-income (DTI) ratio can be as high as 41%, meaning your total debt obligations – including student loans – can make up as much as 41% of your monthly earnings.
In some cases, however, borrowers with positive compensating factors such as long-term employment or a sizable amount of savings may qualify for a higher limit of 44%.
What’s Included in Your DTI Ratio?
So, what else do USDA lenders include in their DTI calculations? Other obligations counted as part of your debt-to-income ratio can consist of:
All proposed housing costs (principal, interest, taxes, insurance, mortgage insurance)
Auto loans
Personal loans
Credit card minimums
Court-ordered debts such as child support or alimony
However, not all of your monthly expenses get calculated into your ratio. Lenders won't add in things like utility bills, health insurance premiums, medical payments, or childcare costs.
USDA Student Loan Guidelines by Status
How do USDA lenders account for your student loan debts? In most cases, they will use your documented student loan payment to determine your DTI. If you're not presently required to make payments, calculations will be based on 0.5% of your remaining student loan balance, or $50 per month for every $10,000 in student loan balances.
What does this mean for borrowers with different types of loan statuses? Let’s take a look at some of the most common scenarios.
Student Loans With Payments Documented on the Credit Report
If your student loan payments are above $0 and correctly listed on your credit report, lenders will use this figure. If your monthly payments differ from what's reported, your lender will require documentation of your actual payment amount.
If your credit report shows a monthly payment of $0, your lender will calculate your payment as 0.5% of your total balance.
Student Loans With No Payment Documented on Credit Report
If you're making monthly student loan payments but the amount is not documented on your credit report, you must provide your lender with proof of your current required payment. If this amount is $0, your monthly obligation will be counted as 0.5% of your remaining student loan debt.
Student Loans in Deferment or Forbearance
Student loans in deferment or forbearance give the borrower a temporary reprieve from making their monthly payments. During this period, which can last up to 12 months under forbearance and three years under deferment, your required payments are $0. As such, lenders must calculate your monthly debt obligation as 0.5% of your loan balance for DTI purposes.
Student Loans on an Income-Driven Repayment (IDR) Plan
Income-driven repayment plans establish a payment amount based on your income level and family size. This generally results in reduced payments for borrowers who qualify. If your student loans are currently in an IDR plan, your lender will use your actual required payments for their calculations so long as they are above $0.
If your income is low enough that your income-driven repayment plan results in a monthly payment of $0, your lender will calculate your monthly obligation as 0.5% of your student loan balance.
Alex Shekhtman, CEO and founder of LBC Mortgage, says, "Having a lot of student loan debt doesn't mean you can't buy a home. The key is managing your monthly payments to keep your debt-to-income ratio in check. Many lenders look at your actual student loan payment, not just the total balance, so options like income-driven repayment plans can make a big difference."
Student Loans in a Forgiveness Plan
Student loans that are part of a forgiveness plan, most frequently the Public Service Loan Forgiveness (PSDLF) program, are still considered your responsibility until your creditor releases you from liability.
As such, lenders must include your current payment amount in their DTI calculations for loans that have not yet been forgiven.
Student Loans Paid by Another Party
Are your student loans listed solely in your name? If so, lenders must consider your full payment amount even if another party – such as a parent, partner, or employer – regularly pays the loans.
This is because loans are still considered your responsibility, and the lender cannot guarantee that the other party will continue making payments in the future.
Student Loans With a Co-Signer
If you have a co-signer on your student loans, you may be able to have the payments excluded from your DTI calculation. This is only possible, however, when the other party to your loan has consistently made the payments for at least the past 12 months. You must provide proof of the payments, such as the canceled checks or copies of your co-signer's bank statement.
If there have been any late payments reported over the last year, though, the lender will be obligated to include the payment amount in their calculations.
Student Loans in Default
If you have federal student loans currently in default, you will not be eligible for any government-backed mortgage, including those offered by the USDA. Borrowers with delinquent federal debts are listed in the Credit Alert Verification Reporting System (CAIVRS) database, which lenders are required to search as part of the loan approval process. Check with your student loan servicer to learn about steps to take to be removed from the CAlVRS database.
How to Qualify for a USDA Mortgage With Student Loan Debt
Is your student loan debt pushing you above the acceptable debt-to-income ratio needed to qualify for a USDA mortgage? You may still have options for bringing your DTI below the agency-established maximum.
Refinance or Consolidate Your Student Loans
Sometimes, you can refinance or consolidate your student loans to lower your monthly payments. This is most frequently the case for borrowers with adjustable-rate loans or those who may now qualify for lower interest rates based on an improved credit score and financial profile.
Since lenders don't care about your total loan balance – only your monthly payments – being able to reduce the amount you're obligated to pay each month will help lower your overall DTI (as long as the payment isn’t reduced to $0).
Pay Down or Consolidate Other Debts
Lenders are only concerned with your monthly payments, meaning that reducing other obligations like credit card or personal loan debt can similarly reduce your DTI and help you qualify for a USDA mortgage.
Consider More Affordable Homes
Most applicants' proposed housing expenses make up a significant portion of their debt-to-income ratio. The USDA currently allows borrowers to have housing expenses that comprise up to 34% of their qualifying income. This includes your principal and interest payments, taxes, and insurance costs.
More affordable homes can lower these housing costs and significantly impact your overall DTI. That doesn't necessarily mean buying a cheaper property; it can also include looking at homes with lower tax assessments or insurance premiums.
Other Mortgage Options for Qualifying With Student Loans
Are you unable to qualify for a USDA loan because of your student debt or other ongoing monthly obligations? Some types of loans allow for a higher debt-to-income ratio. FHA, for example, allows a total DTI above 50% or higher for strong borrowers, compared to 44% for USDA. Although other programs might not have the same benefits as USDA loans, these alternatives may still be an option for getting approved with your current student loan payments.
Conventional Loans
Conventional loans are the most common type of mortgage and allow for a total DTI as high as 50%. With a monthly income of $5,000, this higher ratio gives you an extra $300 in payment leeway compared to a USDA loan at a maximum of 44%.
While conventional mortgages require a down payment, lenders have special programs for first-time and lower-income homebuyers that can get you approved with as little as 3% down. Plus, the minimum required credit score is only 620. In contrast, many – but not all – USDA lenders look for a score of 640 or higher.
Related: Conventional Loans vs. USDA Loans - Which One Is Better?
FHA Loans
FHA loans are another type of government-backed mortgage that is insured by the Federal Housing Administration. These loans allow for a far higher maximum DTI of 56.9% of your monthly qualifying income with strong compensating factors like the same future housing payment as you’re currently paying in rent. Based on the previous example of $5,000 in earnings, an FHA loan could give you an additional $645 in wiggle room for your student loan payments compared to a 44% USDA mortgage.
You'll be required to have a down payment of 3.5% to qualify, but FHA-backed mortgages allow for a credit score as low as 580. Borrowers who can come up with 10% down may even get approved with a score of 500.
Physician Loans
If you’re a medical professional facing substantial student loan debt (the average for med school grads is above $250,000), you may be able to qualify for a physician loan. Often referred to as doctor mortgages, these specialty loans offer considerable flexibility regarding your current earnings and debt-to-income ratio.
In many cases, qualified applicants can get approved for physician loans with no money down, even if they're still in residency or just beginning their professional careers.
Applying for a USDA Mortgage With Student Loan Debt
Lenders treat student loan debt like any other ongoing obligation when calculating your DTI ratio. If your payments don't push your total above the USDA limit of 41% (44% with compensating factors), you can get approved for a loan. Even if they do, you still have options such as reducing your monthly payments or applying through another mortgage program with higher limits.
To find out if you qualify for a USDA-backed mortgage and what other loan options may be available, contact a local lender today.
