As more Americans attend four-year colleges and universities, an increasingly large amount are taking on student loan debt to fund their education. Student loan debt can understandably feel like a burden, but it doesn’t have to prevent you from achieving your dreams of homeownership.
A USDA loan can be a great tool to help recent graduates acquire their first home. While you are required to report any student loan debt in your application, having student debt alone will not cause a lender to automatically reject you.
Student loans are an unfortunate reality for many prospective homebuyers today. With the cost of higher education skyrocketing, student loan debt has become more common and amounts owed are higher than ever before. This can present challenges when trying to qualify for a mortgage, especially government-backed loans with strict debt-to-income ratio requirements like USDA home loans.
In this article, we’ll break down how student loans are calculated when qualifying for USDA financing. While student debt makes getting approved more difficult, we’ll discuss strategies for overcoming this hurdle as a borrower with student loans.
How Student Loans Impact Debt-to-Income Ratios
To qualify for a USDA home loan borrowers must meet two key debt-to-income (DTI) ratio thresholds
- Principal, Interest, Taxes & Insurance (PITI) DTI: Maximum of 29%
- Total DTI: Maximum of 41%
Your total DTI ratio takes into account your proposed monthly mortgage payment (PITI) along with all recurring monthly debts like credit cards auto loans, student loans, etc.
Student loans are particularly impactful since they are installment debts that tend to have large balances yet low minimum payments. According to USDA guidelines, lenders must calculate a monthly student loan payment equal to:
- The actual fully amortizing payment (typically on standard 10-year loans)
- If the payment is deferred or income-driven, the greater of:
- 0.5% of the outstanding balance
- The payment reported on your credit report
As you can see, even deferred loans with $0 payments must be accounted for based on your balance owed. This prevents borrowers from deferring student loans just to qualify for a USDA loan.
Below are a few examples showing how student loan payments are calculated and affect your DTI:
| Loan Info | Payment Calculation | Monthly Payment |
|---|---|---|
| $30,000 balance<br>Standard 10-year term | Fully amortized | $300 |
| $50,000 balance<br>Deferred | 0.5% of balance<br>($50,000 x 0.005) | $250 |
| $80,000 balance<br>Income-based: $0 payment | Credit report: $100 | $100 |
Having a high student loan balance can quickly push your DTI over the 41% limit, making it difficult to qualify for USDA financing
Strategies for Qualifying with Student Loans
While challenging, qualifying for a USDA home loan with student debt is certainly possible. Here are some tips for improving your chances:
Make extra payments to reduce your balance – Paying down principal ahead of time lowers the monthly payment used for DTI on standard loans. For deferred/income-driven plans, you reduce the 0.5% calculation.
Refinance student loans – Private student loan refinancing can potentially lower your interest rate, reduce the monthly payment, and consolidate multiple loans into one. Run the numbers to see if refinancing helps improve your DTI.
Use household income – Include other borrowers on your loan application to increase the income considered. Additional income sources help offset your monthly debts.
Apply with a strong co-borrower – A co-borrower with minimal debts and high income can counterbalance your student loans. Their low DTI helps absorb your higher ratio.
Leverage compensating factors – USDA allows exceeding the 41% DTI threshold if you have qualified compensating factors like a credit score above 680 or savings equal to a few mortgage payments.
Buy below maximum loan limits – Opting for a less expensive home means a lower PITI payment. This reduces your overall DTI and helps offset student loan debts.
Make a larger down payment – Putting down 20% or more lowers the mortgage amount, which decreases PITI and provides more breathing room below the DTI limits.
Seeking USDA Approval with High Student Loan Debt
In cases where student debt leads to a total DTI above 41%, the lender must request a ratio waiver from USDA to gain approval. To qualify, your application must meet the following criteria:
- Credit score of at least 680
- PITI below 32%
- Total DTI below 44%
- Acceptable compensating factors verified – such as 3 months PITI reserves or 2 years of employment
The lender will submit a waiver request to USDA citing your compensating factors. If approved, they will issue a Conditional Commitment and guarantee the loan despite the high DTI.
This waiver gives borrowers with past student loans a viable path to homeownership through USDA’s 100% financing and low rates. With proper planning and preparation, your student debt doesn’t have to be a dealbreaker.
The Bottom Line
Student loans and other installment debts factor heavily into the DTI ratios for USDA home loans. While they can present challenges, various strategies exist to overcome student debt and qualify.
Carefully calculating your payments, reducing balances, refinancing, applying jointly, and securing waivers can help you successfully buy a home with USDA financing – even with the burden of student loans.
Will my student loans prevent me from getting a mortgage?
Student loans are not a disqualifying factor when applying for a USDA loan. There is technically no standardized amount of student loan debt that will prevent you from being approved for a USDA loan.
Your debt comes into play when lenders check your debt-to-income (DTI) ratio. Your DTI ratio is mostly what it sounds like; a lender can compare how much debt you’re responsible for versus how much income you bring in monthly. However, your DTI ratio is actually a combination of two ratios: PITI and total DTI.
PITI stands for principal, interest, taxes, and insurance, and it represents how much housing debt you pay off each month as a percentage of your gross monthly income. Conversely, total DTI demonstrates the ratio of your major monthly debts to gross monthly income, including your student loan debt.
Along with student loans, other debts factored into your total DTI ratio include personal loans, credit cards and car payments. A USDA lender will not approve an applicant with a total DTI over 41%. Smaller debts like phone bills, utilities and insurance premiums are not included.
USDA Loan with Fixed-Rate Student Loans
The monthly expense of a fixed-rate student loan is easy to factor into your total DTI ratio, as the interest rate does not change over the lifetime of your loan. The USDA lender will add your monthly student loan payment to the rest of your major debts and compare it to your gross monthly income.
USDA Student Loan Guideline 2022- What’s New
FAQ
Does USDA use 1% of student loans?
Do student loans affect loan approval?
Can you get denied a home loan because of student loans?
What is the maximum debt-to-income ratio for a USDA loan?