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.
Getting a mortgage when you have student loan debt can seem daunting. Student loans can significantly impact your debt-to-income ratio, which is a key factor lenders consider when approving a mortgage. However, you can still qualify for a home loan if you understand how lenders calculate student loan payments.
How Student Loans Impact Your Mortgage Application
Lenders want to make sure you can afford your monthly mortgage payment along with your other financial obligations. This is why they calculate your debt-to-income (DTI) ratio when reviewing your application.
Your DTI compares your total monthly debt payments to your gross monthly income. It’s expressed as a percentage, with a lower percentage being better.
Here’s the formula:
Monthly Debt Payments / Gross Monthly Income = DTI Ratio
Generally, lenders like to see your DTI below 36%. But many will approve loans for borrowers with DTIs up to 43-50%.
The higher your DTI, the harder it may be to get approved. You’re also likely to pay a higher interest rate if your ratio exceeds 36%.
Your student loans are factored into the “monthly debt payments” part of the DTI formula. So having a large student debt can really inflate your ratio.
But not all lenders calculate student loan payments the same way. This is an important nuance when applying for a mortgage.
Conventional Loan Guidelines
For a conventional loan, lenders can calculate your student loan payment using one of three methods:
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Actual Payment Method: Your documented monthly student loan payment reported on your credit report or provided by your servicer.
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Fully Amortizing Payment Method: A payment calculated based on your total student loan balance, amortized over 10 years at the current interest rate.
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Percentage Method: 1% of your total outstanding student loan balance, divided by 12 months.
For example, if you owed $50,000 in student loans, 1% would be $500. Divided by 12 months equals $41.67.
The lender will use whichever method results in the highest calculated monthly payment. This provides the most conservative estimate of your repayment.
With a conventional loan, your back-end DTI including all debt payments can be up to 45%. But some lenders may approve DTIs up to 50%.
FHA Loan Guidelines
An FHA loan allows a higher back-end DTI of up to 43%. But many lenders will stretch to 50% with strong compensating factors like excellent credit.
For FHA loans, lenders will calculate your student loan payment using one of two methods:
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Actual Payment Method: Your monthly payment reported on your credit report or by your servicer.
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Percentage Method: 0.5% of your total outstanding student loan balance, divided by 12 months.
Using our earlier example, 0.5% of $50,000 would be $250. Divide by 12 months for a $20.83 monthly payment.
Again, the lender will use the higher of the two calculations.
VA Loan Guidelines
VA loans have the most flexible DTI requirements. They allow total DTIs up to 41%, and many lenders will go up to 50-55% with compensating factors.
VA loans have a specific method for counting student loan payments in DTI:
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Take 5% of your total student loan balance.
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Divide this by 12 months.
So if you had $50,000 in student loans, you’d take 5% ($2,500). Divide by 12 for a $208 monthly payment.
However, if the payment on your credit report is higher than the 5% calculation, the lender must use the credit report amount.
The VA does not allow use of the fully amortized payment method.
USDA Loan Guidelines
For a USDA home loan, your back-end DTI can be up to 41%. Some lenders may allow up to 50%.
Your monthly student loan payment is calculated in one of two ways:
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Actual Payment Method: Use the monthly amount from your credit report or student loan servicer.
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Percentage Method: 0.5% of total student loan balance, divided by 12 months.
USDA loans use the same percentage (0.5%) as FHA loans. But they do not allow the fully amortized payment method.
Whichever method results in the higher monthly payment is used for DTI calculations.
Exceptions to Standard Payment Calculations
In certain situations, your student loans may be excluded from DTI calculations or subject to alternative payment calculations:
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Loans paid by others: If you can prove someone else has been fully paying your loans for at least 12 months, the payment may be excluded.
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Forgiven/discharged loans: Loans that have been completely forgiven, cancelled, or discharged are generally not included in DTI ratios.
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Deferred loans: For VA loans, if your payments are deferred at least 12 months, they can potentially be excluded from DTI.
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Physician loans: Special financing for doctors, dentists, and other medical professionals may allow excluding student loans from DTI.
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Delinquent federal loans: Defaulted federal loans can prevent approval due to credit reporting system CAIVRS.
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No payment on credit report: If your credit report shows no monthly payment, the lender may have to estimate a payment themselves.
The exceptions around counting student loan debt for DTI purposes are complex. Be sure to discuss your unique situation with loan officers to determine the optimal approach.
Strategies to Improve Your DTI
If your DTI is too high because of large student loans, you have options to improve your ratio. This can help you qualify for the mortgage amount you need. Consider these strategies:
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Pay down debts with the highest monthly payments first, rather than highest balances. Removing these obligations from your DTI can help most.
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Refinance student loans to lower your monthly payment. This directly reduces your back-end DTI.
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Consolidate debts into one lower monthly payment through a personal loan or balance transfer credit card.
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Increase income with a promotion, new job, second job, or side business. A higher income allows for a higher debt load.
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Enlist a co-borrower with good DTI to jointly apply for the mortgage. Their income can offset your debt obligations.
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Ask lender to recalculate using alternative payment calculations that minimize your payment.
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Adjust purchase price to a lower amount that fits your DTI constraints. This may allow buying now instead of later.
With creativity and financial diligence, you can work around high student loans to qualify for a mortgage. Know your DTI, research loan program options, and discuss your entire financial picture with lenders. This helps ensure your student debt is calculated in the most favorable way possible.
Frequently Asked Questions
How do lenders check my student loan payment amount?
Lenders first look at the monthly payment listed on your credit report. If no payment is shown, they will contact your student loan servicer to verify the monthly amount. If unavailable, they calculate a payment themselves based on a percentage of your total balance.
What if my actual payment is less than what the lender used?
Even if your true payment is lower, the lender must use the highest calculated payment amount for DTI purposes. This ensures they accurately assess your debt obligations.
What if I’m on an income-driven repayment plan?
Your actual monthly payment on an income-driven plan can be used for DTI if properly documented. These plans can sometimes provide a lower payment to help mortgage qualification.
Do lenders just look at the monthly payment?
No, lenders will also factor total outstanding student loan balances into their decision. Large debts can raise questions about long-term affordability, even if the monthly payment works.
What if I pay extra each month to pay off loans faster?
Your regularly scheduled payment is used for DTI, without factoring any additional voluntary payments you make. These can certainly help reduce principal faster but don’t affect mortgage calculus.
How can I optimize my DTI if I have high student loans?
Explore alternate repayment plans to lower payments, apply with a co-borrower, look to physician loan programs, increase your income, or lower your purchase price. Meeting with a loan officer to discuss options can be helpful.
What if I don’t know my total balance owed?
Contact your student loan servicer(s) to get an official current statement of all outstanding student debts. This is required information for the mortgage application.
Can I get a mortgage if my DTI is over 50%?
It is unlikely you would qualify for a traditional mortgage with a DTI over 50%, unless you have a non-traditional product or specific loan program. Improve your DTI or consider alternative financing options.
What if I have only a small amount of student loans?
Even small student loan balances will impact your DTI. But with a modest debt amount and solid income, you can likely absorb the impact more easily than with massive loans
Your ideal DTI ratio is lower than 35%
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 cant afford another debt payment |
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.