Getting a Mortgage with Income-Driven Student Loan Debt
If you're swimming in high student loan debt, income-driven (IDR) plans can be a lifesaver. These plans - IBR, ICR, PAYE, and REPAYE - help keep your monthly student loan payment from swallowing your whole income. This means that student loans aren't like other debts. Payments grow (and shrink) along with your paycheck.
Traditionally, this flexibility has confused mortgage lenders. Old, rigid underwriting standards excluded many student loan borrowers from mortgages and homeownership. Fortunately, lender requirements have become more flexible in evaluating income-driven student loan debt.
So, how much mortgage can a student loan debtor qualify for? Here are the general requirements for each major mortgage program --
For conventional Fannie Mae-backed loans:
Calculate 45% of your monthly pre-tax income. Now, subtract all of your monthly debt payments including credit card minimums, auto loans, and (of course) your student loan payments. For this purpose, lenders will calculate your student loan payment as:
The actual payment if shown on your credit report, or
1% of the total student loan balance if a $0 payment is reported or no information is provided.
This amount is your maximum monthly expenses allowed for the home purchase, including mortgage, property tax, condo fee, and insurance.
For conventional Freddie Mac-backed loans:
The Freddie Mac calculation is a bit different, but follows the same idea. Take 50% of your monthly income and subtract all monthly debt payments. Under these standards, lenders will consider your student loan payments as:
The greater of the actual payment on your credit report or 0.5% of the total balance. If no monthly payment appears on your credit report, or if it's $0, then the lender will assume a monthly student loan payment of 1% of the total student loan debt.
This remaining amount will be your maximum monthly budget for the mortgage, property tax, condo fee, and insurance.
For portfolio loans:
Some small, community banks may not intend to sell your loan on the secondary market. This means that they do not have to comply with the Fannie Mae or Freddie Mac standards. However, in practice, their requirements are often pretty similar. In many cases, their rules may even be more stringent.
For FHA loans:
FHA loans can be great for first-time homebuyers with very low down payment requirements, as low as 3.5%. However, they have a less generous policy on income-driven student loan debt. To calculate your maximum eligibility for an FHA loan:
Take 43% of your monthly pre-tax income and deduct all debt payments. For FHA's purposes, your student loan payment here is the greatest of 1% of the total student loan balance, the actual monthly payment shown on your credit report, or the actual payment that would pay off the loan over the regular term.
Just like the other calculations, the remaining amount is your maximum monthly housing budget.
For VA, USDA, and other specialty loans:
Other, specialized loans may offer much more generous treatment of student loan debt. If you would be eligible for a VA or USDA loan, for example, you should speak with a loan officer knowledgeable of these programs.
If you're ready to buy a home or need help planning how to get there, please contact us for help.