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Student loans can be an excellent option to help finance higher education, but it’s important to understand how they work with mortgage programs like those offered by Fannie Mae. This comprehensive guide will explain how Fannie Mae treats student loans when underwriting mortgage applications, key eligibility factors, tips for qualifying, and alternative programs to consider.
How Fannie Mae Considers Student Loans
When you apply for a Fannie Mae mortgage the lender will review your recurring monthly debts to calculate your debt-to-income (DTI) ratio. This includes any student loan payments you are making.
According to Fannie Mae guidelines
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All student loan payments must be included in DTI if there are more than 10 monthly payments remaining.
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Deferred or in-forbearance loans can be counted as a 1% payment of the balance.
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Income-driven payment plans can be counted based on the actual monthly payment, even if it is $0.
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Payments for federal student loans in deferment, forbearance or income-driven plans are excluded from DTI if paid by others.
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Payments by employers, states, school, etc. directly to the servicer can be excluded with documentation.
So in short, Fannie Mae requires all your student loan payments be factored into your DTI to ensure you can afford the mortgage payment along with other monthly debts.
Student Loan Eligibility for Fannie Mae Mortgages
To qualify for a Fannie Mae loan like a conventional mortgage, there are some key requirements around your student loans:
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Loans must be current – no late payments in the last 12 months.
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Payments must be likely to continue for the first five years of the mortgage.
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Payments from deferment periods cannot be omitted from DTI.
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Income-driven plans must be recertified annually.
Meeting these eligibility conditions ensures your student loan is counted appropriately in the debt assessment. Having significant student loan debt doesn’t necessarily make you ineligible, as long as you can show you can manage the payments.
Tips for Qualifying for a Mortgage with Student Loans
If you have substantial student debt, here are some tips that can strengthen your mortgage application with Fannie Mae:
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Make extra payments before applying to get loans paid ahead. This reduces balances counted in DTI.
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Recertify income-driven plans to get the lowest payment possible.
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Provide documentation if you have payments made by others not on the loan.
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Consider paying down balances below 10 monthly payments remaining to exclude from DTI.
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Increase your down payment and reserves if possible to offset higher DTI.
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Add a co-borrower to the mortgage application to supplement your income.
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Opt for a mortgage insurer that uses more lenient DTI thresholds.
Taking some of these steps in advance can help overcome DTI challenges posed by hefty student loans when applying for a home loan with Fannie Mae.
Fannie Mae Student Loan Refinance and Assistance Programs
Fannie Mae doesn’t offer student loan refinancing directly, but they do allow you to include student loan payments paid by others in certain cases:
Employer Student Loan Assistance
Some employers provide student loan repayment benefits to employees. Fannie Mae allows these payments to be excluded from DTI with documentation showing 12 months of payments by the employer.
Payments by Family Members
Fannie Mae also allows non-mortgage debts like student loans paid by a family member to be excluded from DTI, provided they show a 12-month history of making the payments for you.
Federal Student Loan Repayment Programs
For federal student loans, Fannie Mae permits loan payments made through government student loan repayment programs to be left out of your DTI as well.
Alternatives to Fannie Mae to Finance a Home with Student Loans
In addition to Fannie Mae, these popular mortgage programs may offer more flexibility or options to qualify if you have substantial student loan debt:
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FHA loans – Allow for higher DTIs above 50% with a strong credit profile. Popular for first-time buyers with heavy student loan burdens.
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VA loans – VA mortgages do not count your student loans at all in debt-to-income calculations. Best option for qualifying if you served in the military.
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USDA loans – For borrowers in rural areas, USDA mortgages often allow higher DTI ratios above Fannie Mae’s 50% limit.
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Portfolio loans – Check local banks and credit unions for portfolio loan programs with more customized underwriting for your scenario.
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Non-QM loans – Lenders offer non-qualified mortgages outside Fannie guidelines with alternative income calculations.
Shopping multiple mortgage options beyond Fannie Mae is key to find the right fit if student debt is impacting your DTI. An experienced loan officer can guide you in determining the best programs to consider.
Finding the Right Student Loan Repayment Strategy for Homebuying Goals
To buy a home through Fannie Mae sooner, consider adjusting your student loan strategy:
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Make extra principal payments to shrink loan balances quicker before applying.
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Refinance federal or private loans to lower interest rates and monthly payments.
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Shift loans to extended terms like 25-year repayment if eligible.
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Enroll in income-driven plans to obtain the lowest payments possible.
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Discuss forbearance or deferment options with your servicers if you run into financial hardship.
The easier you can make qualifying with Fannie Mae, the more financing options and better mortgage rates will be available to you.
Common Questions about Fannie Mae Loans and Student Debt
Can I get a mortgage through Fannie Mae if I only pay the minimum on my student loans?
Yes, but it may be harder to qualify and you will likely pay higher rates. Paying the minimum results in larger balances counted toward your DTI ratio. Making extra payments first is recommended when possible.
Do all student loans count against my DTI for Fannie Mae mortgages?
Both federal and private student loan payments must be counted in your debt-to-income calculations per Fannie Mae guidelines. The only exceptions are payments made by others with documentation.
What student loan debt-to-income ratio is acceptable to Fannie Mae?
Fannie Mae doesn’t limit specifically based on your student loan DTI. But your back-end DTI including all debts like student loans cannot exceed 50% in most cases. Student loans over 10-15% of income often make qualifying difficult.
Can I pay off student loans right before closing to exclude from DTI?
Yes, Fannie Mae allows debts paid off prior to closing to be excluded from DTI. But you can’t use a new loan to pay off the student debt. Savings must be used.
What if I can’t qualify for a Fannie Mae loan because of student loans?
If your DTI is too high, look into alternative mortgage programs like FHA, VA, USDA, or portfolio lending. Each has different requirements that may overlook student debt.
The bottom line is that qualifying for a Fannie Mae mortgage with hefty student loans is possible with the right repayment strategy and mortgage program. But you need to plan ahead and be prepared to shop multiple options to find the right lender willing to approve your situation.
How to get a mortgage when you have student loans
Keep in mind your DTI ratio is just one element in the underwriting process, and there are often compensating factors, such as credit score, that lenders use to determine if you qualify for a loan.
If you have student loans and want to improve your chances of being approved for a mortgage, here are some tips:
- Switch to an income-driven repayment plan – “This can help lower your DTI ratio and increase your odds of getting approved,” says Tayne. “It’s a good idea to make this switch at least a year before applying for a mortgage loan.” Keep in mind that this option only applies to federal student loans.
- Shop around – Research the competition and choose a reputable lender who can help you get preapproved. “An experienced loan officer can discuss your student loan situation with you and offer financing programs best structured to meet your budget goals,” says Donny Schulze, a mortgage banker with Embrace Home Loans in Hauppauge, New York.
- Add a co-borrower to the loan – “Additional income always helps with qualification,” says Juan Carlos Cruz, founder of Britewater Financial Group, based in Brooklyn, New York. “This is an easy way to reduce your DTI ratio — but be sure your co-borrower has little to no debt and a high credit score.”
- Expand your search – Consider buying a less-expensive or smaller home, or possibly in a more affordable area.
- Wait things out – “Save up for a larger down payment, reduce your debt and allow any negative information on your credit report to age, which can bolster the likelihood of you getting approved,” says Tayne.
Freddie Mac student loan guidelines
The Freddie Mac guidelines for student loans are similar to Fannie Mae’s, save for one key difference: If your loans are in forbearance or deferred, or your payment is otherwise documented as $0, your lender can factor in just 0.5 percent of your student loan balance to calculate your DTI ratio.
What if you’re close to paying off your student loans? Both Fannie Mae and Freddie Mac guidelines address this. In general, if you have 10 months or less left on your repayment plan, your lender can opt not to include your student loans in the DTI ratio at all. (This is also true for other types of debt, like auto loans.)
This might also be the case if your student loans are set to be fully forgiven. In either scenario, you’ll have to prove this through your student loan statements.