An alarming amount of adults are strapped down with some kind of student loan baggage. In fact, around 65% of college-educated adults, and as much as 12.9% of total people in the United States have student loan debt. When asked about why they hadn’t bought a house yet, many adults responded that student loans were holding them back. Student loans can present as a speed bump in the home-buying process, but it doesn’t always have to be that way! Today we’re going to get down into the nitty-gritty about buying a home while having student loan debt.
What percentage of student loans do we look at?
Student loans can be tricky when it comes to knowing how they will affect your debt-to-income ratio (remember: debt-to-income ratio is the percentage of your monthly debt compared to your monthly income). Each loan program has its own specific guidelines when it comes to counting student loans against you as a monthly debt. For example, USDA guidelines dictate that lenders must count 0.5% of your total student loan debt as a monthly payment against your debt-to-income ratio. Here is a list of what our other loan programs guidelines state:
- Conventional (Fannie Mae and Freddie Mac): 0.5% of total student loan
- FHA: 0.5% of total student loan (as of September 1, 2021)
- USDA: 0.5% of total student loan
- VA: 5% of total student loan balance divided by 12 months
- You have $35,000 in total student loan debt and are seeking a conventional loan, your lender will take 0.5% of 35,000, which will equal 175. That means your lender will add in $175 towards your monthly debt.
- Let’s say you are a veteran, eager to use your VA loan, and have $40,000 in student loans. Your lender will do this math: 40,000 x 5% = 2,000. 2,000 divided by 12 = 166.66. This means that your lender will add $166.66 towards your monthly debt.
These guidelines are what lenders stand by if your credit report shows $0 a month payment for your student loans. This is a possibility if your loans are in deferment or if your income-based plan (or IDR) reports as $0 a month.
What if I pay monthly on my student loans already?
Historically, lenders had to use these percentages for student loans no matter what. Sometimes this caused problems for people who are on income driven repayment plans, whose monthly payment was much lower than what the percentages calculated. However, as of September 1st of this year, lenders can now use the amount that reports on your credit report as your monthly payments. This is HUGE for borrowers who have low monthly payments on higher-balance student loans. For instance, instead of having to calculate 0.5% of a $70,000 student loan, we can use the borrowers $25 income driven plan payment! This can be the difference in an approval or denial for DTI purposes for some clients!
Student loans can complicate things for mortgages, but they don’t have to. Reach out to one of our loan experts to see if we can make your student loan payments work for you!