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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 DTI gives the strongest indication of your ability to repay a mortgage. The lower your DTI ratio, the better your chances of approval and of getting a low interest rate.
| DTI ratio | How lenders view it |
|---|---|
| 35% and lower | Good: 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 higher | Poor: 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.
Higher DTI ratios may lead to higher rates and fees
If you have a conventional loan and your DTI rises above 40%, you could see higher interest rates or a fee at closing. This added cost only applies to those borrowing more than 60% of their home’s value. The fee can range from 0.25% to 0.375% of the loan amount.
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 type | Back-end DTI ratio allowed | How the lender calculates your monthly payment |
|---|---|---|
| Conventional loan | 45% | Your actual documented payment, your fully amortizing payment or 1% of your outstanding loan balance divided by 12 months |
| FHA loan | 43% with exceptions above 50% | Your actual documented payment or 0.5% of your outstanding loan balance divided by 12 months |
| VA loan | 41% | 5% of your outstanding loan balance divided by 12 months or, if it’s higher, the monthly payment shown on your credit report |
| USDA loan | 41% | 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 |
Delinquent federal student loan debt can lead to mortgage denial
Some government-backed loan programs require a Credit Alert Verification Reporting System (CAIVRS) check, which runs your name through a database to see if you have any delinquent federal debt. Delinquent or defaulted federal student loan debt can come up in a CAIVRS check and could prevent you from qualifying for a loan.
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):
- Consolidate your debt
- Consolidate your student debt
- Refinance your student loans
- Refinance your car loan
How to raise your income
On the other side of the equation, you could increase your income. Possibilities include:
- Negotiating a higher salary
- Obtaining a promotion
- Taking on a side hustle
- Starting a side business
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.
- Down payment assistance programs
- Closing cost assistance programs
- First-time homebuyer programs
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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- Your ideal DTI ratio is lower than 35%
- Different mortgage types have different student loan guides
- You can improve your DTI
- Assistance programs are available
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