Student loan debt is at an all time high with over 44 million Americans owing a total of $1.5 trillion in student loan debt. This huge debt burden is making it harder for many prospective homebuyers to qualify for a mortgage. Fannie Mae the largest provider of mortgage financing in the U.S., has specific policies regarding how student loan debt is counted when evaluating a borrower’s eligibility. In this article, we’ll explain Fannie Mae’s student loan policies and how student debt impacts your ability to get a Fannie Mae backed mortgage.
Fannie Mae’s Policies on Student Loan Debt
When you apply for a mortgage, the lender has to evaluate your monthly debts to determine if you have enough income to make the mortgage payment. Fannie Mae has specific guidelines lenders must follow when counting student loan payments as part of the borrower’s monthly obligations. Here are some key points on how Fannie Mae treats student loans
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If the credit report shows a monthly student loan payment, the lender can use that amount for qualifying purposes.
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If the credit report doesn’t show the correct monthly payment, the lender can use the monthly payment on the borrower’s student loan documentation
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If the credit report doesn’t have a monthly payment or shows $0, the lender must calculate a qualifying payment using one of two options:
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For income-driven payment plans, use the actual $0 monthly payment if documentation supports this.
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For deferred loans or loans in forbearance, calculate either 1% of the total student loan balance or a fully amortizing payment using the documented loan repayment terms.
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The lender can exclude student loan payments if they are being paid by someone else, such as the borrower’s parents. Documentation must be provided to show 12 months of payments by the other party.
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Student loans in an income-based graduated repayment plan will increase over time. The lender must use the greater of the initial payment amount or the fully amortizing amount.
As you can see, Fannie Mae provides some flexibility for counting student loans, but the overall impact is the debt still reduces the amount the borrower can qualify for. The lender must verify the actual monthly payment, or calculate an appropriate amount based on repayment terms or percent of balance. Simply excluding the debt altogether or allowing a $0 payment without documentation is not permitted.
How Student Loan Debt Impacts Mortgage Eligibility
The more student loan debt you have, the harder it may be to qualify for a mortgage under Fannie Mae guidelines. Here are some key ways student loans affect mortgage eligibility:
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Higher debt-to-income ratio: Your total monthly debt payments are divided by your gross monthly income to derive your debt-to-income ratio (DTI). The higher your student loan payment, the higher your DTI will be. Fannie Mae generally caps DTI at 50%.
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Lower amount qualified for: Since your student loan payment reduces the amount of your monthly income that can go toward the mortgage payment, it lowers the size of loan you may qualify for.
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Harder to qualify if payments not established: For deferred loans or loans in forbearance, the lender has to calculate an estimated payment. This may make it harder to qualify compared to a borrower who has an established payment history.
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Longer debt payment history: Fannie Mae wants to see a history of on-time student loan payments. Having a longer history of consistent payments improves your credit profile.
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May need a co-signer: Some borrowers with high student debt and limited income may only qualify with a co-signer that has stronger credit history, higher income, and lower debt.
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Delay buying: Recent graduates with very high student debt may need to delay homeownership until their income increases and debt decreases.
While having student loan debt does not preclude you from getting a mortgage, it certainly has an impact on affordability and loan eligibility. The higher your payments and overall student debt, the more difficult it will likely be to qualify for the mortgage amount you desire.
Strategies for Reducing the Impact of Student Loans
If you have a sizable amount of student debt, here are some proactive steps you can take to improve your mortgage eligibility:
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Make payments on time every month – don’t miss or delay payments. This shows you can manage your student debt responsibly.
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Pay down balances as quickly as possible – pay more than the minimum due. Lower balances mean lower required payments.
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Explore income-driven payment plans that base your payment on your income. This may result in more affordable payments.
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Get on an extended repayment plan to stretch out payments over a longer period, reducing your monthly payment.
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Consolidate or refinance student loans to reduce your interest rate and monthly payment. Be cautious of extending terms too long.
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Ask lenders if they offer student loan payment assistance programs for borrowers – some may help make payments while you save up for a home.
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Build up your credit, income, and savings. This will help offset some of the impact of student loan debt.
With proper planning and disciplined financial habits, you can successfully manage your student debt while pursuing homeownership. Don’t let student loans stop you from buying a home. Understand how Fannie Mae counts student debt and take action to lessen the impact. You can achieve your dream of homeownership even while paying off student loans.
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mortgage: 15
payment: 14
If you’re a student
We’ve got tools, resources, and information that can help you throughout your borrowing journey:
- Before you apply, make sure you fully understand private student loans.
- Figure out if you should consider a cosigner—and find out details like who can cosign, cosigner responsibilities, and how to apply to release a cosigner.
- See how you can graduate with less student loan debt.
- Use our student loan repayment calculator to estimate monthly student loan payments.
- Need more help? Call us at 877-279-7172
Student loans built with you in mind
We provide you with a number of different paths to get you started on your educational journey. All you have to do is choose the right one for you.
Fixed rates: 4.50% APRfootnote 1 – 15.49% APRfootnote 1
Variable rates: 5.37% APRfootnote 1 – 15.70% APRfootnote 1
For college students earning a bachelors or associates degree, or a certificate at a degree-granting school.
Lowest rates shown include the auto debit discount.
Fixed rates: 4.50% APRfootnote 2 – 15.69% APRfootnote 2
Variable rates: 5.37% APRfootnote 2 – 16.46% APRfootnote 2
For students taking professional training or certificate courses (such as culinary, aviation, technical, etc.).
Lowest rates shown include the auto debit discount.
For graduate students seeking loans for medical, dental, health professions, MBA, law, and masters/doctorate degree expenses. Rates vary by loan.
Adding a cosigner may strengthen your student loan application
If you have little or no credit history, consider a cosigner. Last year, students were 3.5x more likely to be approved for a student loan with one!footnote 3 Last year, 88% of Sallie Mae® undergraduate loans were cosignedfootnote 4 and it may help you get a better interest rate on your student loan.
How to get a mortgage with student loans. Guideline breakdown
FAQ
Does Fannie Mae do student loans?
Does Freddie Mac do student loans?
Are student loans counted in a mortgage?
Can I buy a house if I have student loan debt?
Can Fannie Mae ignore student loan payments?
Fannie Mae does, however, allow lenders to ignore student loan payments that have been paid, on time, by a third party for the past twelve months. FHA loans are 3.5% down home mortgages insured by the Federal Housing Administration. They allow borrowers to qualify with a credit score as low as 580.
Does Fannie Mae finance student housing?
At Fannie Mae, we understand that the student housing industry serves a critical need for our country’s higher education. That’s why we have financed over $11 billion of Student Housing! Find out the terms, benefits, and eligibility for financing Enhance your deal through these creative financing options:
Will FNMA/OTC help borrowers with student debt qualify for a home loan?
WASHINGTON, DC – Fannie Mae (FNMA/OTC) announced new policies that will help more borrowers with student debt qualify for a home loan. These innovations address challenges and obstacles to homeownership due to a significant increase in student loan debt over the past decade and provide access to credit for qualified borrowers.
Can I get a mortgage while managing student loan debt?
To get a mortgage while managing your student loan debt, you will need to make sure your finances are strong enough to be approved for one. This may mean saving up for a substantial deposit or ensuring your earnings can cover both your student loan payments and mortgage payments, among other steps.
Does Fannie Mae have a home equity line of credit?
When the mortgage that will be delivered to Fannie Mae also has a home equity line of credit (HELOC) that provides for a monthly payment of principal and interest or interest only, the payment on the HELOC must be considered as part of the borrower’s recurring monthly debt obligations.
Does Sallie Mae offer student loans?
Sallie Mae also offers student loans for graduates studying for the bar exam or relocating for medical and dental residencies. Private loans for college—offered by banks like Sallie Mae, credit unions, and other financial institutions—are based on your creditworthiness.