Qualifying For a Mortgage Even With Student Loan Debt

For thousands of recent graduates who found it almost impossible to get their college degree without taking out some sort of student loan, have also experienced yet another unexpected consequence – your student loan has impacted whether or not you'll qualify a mortgage.

Record high tuition figures and living expenses mean student loans are almost a necessity for many and a requirement for some. Recent data shows that Americans ages 18 to 29, 37% of them have student loan debt. That's more than one in three. Today, there is roughly $1.4 million in outstanding student loan debt. That's more than what is owed on all credit cards in today's economy. And student loan payments are calculated just like any other monthly debt when applying for a mortgage.

But, while the prospect of getting a mortgage might seem out of reach, there is some light at the end of the tunnel.  Recently, guidelines have loosened up a bit that could make it much easier for people with student loan debt to qualify for a mortgage. Here are the details.

Who do these new rules Impact?

These new rules impact people with federal student loan debt who are currently on an income-driven repayment program. An income-driven repayment plan sets your monthly student loan payment at an amount that is intended to be affordable based upon your income and family size. Depending upon the plan, your monthly payment could be capped as low as 10% of your discretionary income. And if your discretionary income is low enough, your monthly payment could be as low as $0.

What has changed??

In order to qualify for a mortgage, a borrower needs to meet certain debt-to-income (DTI) requirements. That seems simple enough. However, there was confusion regarding federal student loan debt on an income-driven repayment program. When calculating a debt burden, should the underwriter include the standard student loan payment, the reduced payment, or something in between?

The new statement from Fannie Mae makes it clear:  the reduced payment can be used, even when the payment is $0. According to Fannie Mae, “if the lender obtains documentation to evidence the actual monthly payment is $0, the lender may qualify the borrower with the $0 payment as long as the $0 payment is associated with an income-driven repayment plan.”

Does this apply to all mortgage products?

No, this does not apply to all mortgages. These rules are part of the Fannie Mae “seller’s guide,” which establishes the minimum criteria for mortgages to be sold to the government agency. Lenders can have overlay guidelines that are tighter than the minimum requirements. In addition, many banks offer products that are not meant for sale to Fannie Mae or Freddie Mac, which means these rules may not apply.

But don’t despair: agency-backed mortgages represent more than half of the mortgage market, which means the impact of Fannie Mae’s guidelines will be significant and widespread.

What if i have a private student loan?

Unfortunately, none of these changes will apply to those with private student loans. As a general rule, student borrowers should max out federal loans before considering private loans. And you should be very careful before refinancing a federal student loan with a private lender. Proceed cautiously: you might get a lower rate today by refinancing, but you will give up access to income-driven repayment programs in the future.  Do not hesitate to reach out to your mortgage lender for advice in planning the next steps to ensure that you are receiving reliable information that will enable you to make the right choices throughout the mortgage process.