How can I qualify for a mortgage with my student loan debts?
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To understand how student loan affect a buyer, we first have to understand how mortgage underwriters calculate debt to income ratio, another word budgeting. The typical standard rule of thumb for debt to income ratio is at 50% back end, that is when a borrower add up all the MINIMUM PAYMENTS list on her or his CREDIT REPORT, child support, alimony, and the future monthly mortgage payment (PITI and HOA dues) should be 50% or less of the borrower's gross monthly income. This DOES NOT include any utilities, cell phone bill or insurance. So how to calculate Student Loans when it is in Deferment? Here are the underwriting rules for Conventional Loans, FHA, VA and USDA:
For Conventional Loans Fannie Mae and Freddie Mac calculate the payment differently:
For Fannie Mae: If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must determine the qualifying monthly payment using one of the options below.
If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment.
For deferred loans or loans in forbearance, the lender may calculate
a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or
a fully amortizing payment using the documented loan repayment term. FOR DETAIL OF THIS INFO, HERE IS A LINK: https://selling-guide.fanniemae.com/Underwriting-Borrowers/Liability-Assessment/Monthly-Debt-Obligations/Student-Loan-Payments/1980368541/FAQs-Student-Loan-Debt-Requirements-Feb-2023.htm
For Freddie Mac:
Student loans in repayment, deferment or forbearance For student loans in repayment, deferment or forbearance:
If the monthly payment amount is greater than zero, use the monthly payment amount reported on the credit report or other file documentation, or
If the monthly payment amount reported on the credit report is zero, use 0.5% of the outstanding loan balance, as reported on the credit report
Student loan forgiveness, cancelation, discharge and employment-contingent repayment programs The student loan payment may be excluded from the monthly debt payment-to-income ratio provided the Mortgage file contains documentation that indicates the following:
The student loan has 10 or less monthly payments remaining until the full balance of the student loan is forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, or
The monthly payment on a student loan is deferred or is in forbearance and the full balance of the student loan will be forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, at the end of the deferment or forbearance period
AND
The Borrower is eligible or approved, as applicable, for the student loan forgiveness, cancelation, discharge or employment-contingent repayment program, and the Seller is not aware of any circumstances that will make the Borrower ineligible in the future. Evidence of eligibility or approval must come from the student loan program or the employer, as applicable.
Here is the link to Freddie Mac on Student Loan: https://guide.freddiemac.com/app/guide/section/5401.2
FHA Loans - For outstanding Student Loans, regardless of payment status, the Mortgagee must use: II.A.5.a.iv(G) Student Loans (Manual)
(1) Definition Student Loan refers to liabilities incurred for educational purposes.
(2) Standard The Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments. The Mortgagee may exclude the payment from the Borrower’s monthly debt calculation where written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full. • 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.
Here is the link to FHA Mortgagee Letter on June 17, 2021: https://www.hud.gov/sites/dfiles/OCHCO/documents/2021-13hsgml.pdf
VA Loans -
If the borrower(s) provides written evidence that the student loan debt will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered. If a student loan is in repayment, or scheduled to begin within 12 months from the date of VA loan closing, the lender must consider the anticipated monthly obligation in the loan analysis and utilize the payment established by calculating each loan at a rate of five percent of the outstanding balance divided by 12 months. Example: A borrower has a $25,000 student loan balance and you multiple it by 5%, which equals $1,250. This amount ($1,250) is divided by 12 months to equal a monthly payment of $104.17. If the payment(s) reported on the credit report for each student loan(s) is greater than the threshold payment calculation above in a above, the lender must use the payment recorded on the credit report. If the payment(s) reported on the credit report is less than the threshold payment calculation above, in order to count the lower payment, the loan file must contain a statement from the student loan servicer that reflects the actual loan terms and payment information for each student loan(s).
Here is the link for VA underwriting guidelines:
https://benefits.va.gov/WARMS/docs/admin26/m26-07/Ch4_Underwriting_NEW.pdf
USDA Loans -
Non‐Fixed Payment loans: The required payment for non‐fixed payment/rate/term loans is updated per the GovDelivery published September 23, 2019. All income based payments, graduated or adjustable schedules, etc. must use the greater of the following:
One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, or
The current documented payment under the approved repayment plan with the creditor.
Fixed payment loans: A permanent amortized, fixed payment may be used in the debt ratio when the lender retains documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed. The Fixed payment will fully amortized/pay in full the debt at the end of the term.
Here is the link with more detail information on USDA guidelines: https://www.rd.usda.gov/sites/default/files/RD-SFH-HB11RevisionAid.pdf
UNDERSTAND scenarios for each borrower is different and more detail underwriting guidelines have to be considered in each loan, but information should provide some sense of how to approach home purchase.