Student Loans and Debt-to-Income Ratio: What You Need to Know

• Your student loans do count towards your debt-to-income ratio when applying for a mortgage, even if they’re in deferment or forbearance.

• Lenders calculate student loan payments differently for DTI: Fannie Mae uses 1% of the loan balance if showing $0 payment, while FHA uses your actual income-driven repayment (IDR) amount if greater than $0, or 0.5% of the loan balance otherwise.

• Enrolling in an IDR plan can potentially lower your DTI by reducing your monthly student loan payment and improving your chances of mortgage approval.

Are you juggling student loan payments while dreaming of homeownership? You’re not alone. Whether you’re carrying $10,000 or $200,000 in student debt, the question looms large: Do student loans count towards DTI (debt-to-income ratio) when buying a house?

The short answer is yes, but it’s not as straightforward as you might think. Your student loans can impact your ability to secure a mortgage, but they don’t automatically disqualify you from homeownership. In fact, many of our clients from all careers, income ranges, and student loan balances have been able to qualify for a home loan.

Related: Do Student Loans Affect Buying a House?

Student loans directly impact your debt-to-income ratio by increasing the “debt” part of the equation. Your DTI ratio is a simple fraction:

Monthly Debt Payments / Gross Monthly Income

Student loan payments are part of your monthly debt payments, along with other obligations like credit card minimums, auto loans, and personal loans. By adding to your monthly debts, student loans increase the top number in this fraction, potentially raising your overall DTI ratio.

Lenders use this ratio to assess your ability to take on a mortgage. A higher DTI ratio, influenced by student loan payments, could affect your mortgage eligibility or the amount you can borrow.

Related: Can You Buy a House With Defaulted Student Loans

If your student loans are in deferment or forbearance, you might think they won’t affect your DTI. Unfortunately, it’s not that simple.

Yes, deferred student loans are included in DTI calculations, even if you’re not making payments. Here’s how different lenders handle it:

• Fannie Mae: If your credit report shows $0 payment, they’ll use 1% of your loan balance as the monthly payment. For a $50,000 loan, that’s $500 per month.

• Freddie Mac: If your credit report shows a $0 payment because your loans are in deferment or forbearance, Freddie Mac requires that 0.5% of the outstanding loan balance be used as the monthly payment.

• Federal Housing Administration: FHA loans use your actual Income-Driven Repayment (IDR) plan payment amount, as long as it’s greater than $0. If your payment is $0, or if your loans are in deferment or forbearance, they’ll use 0.5% of your loan balance. For a $50,000 loan with no payment, that’s $250 per month.

• Other lenders: Policies vary, but many use between 0.5% to 1% of the loan balance.

Related: Do Deferred Student Loans Affect Getting a Mortgage?

Here’s the twist: If you’re on an income-driven repayment plan, your actual payment might be lower than these calculations. For example:

• Loan balance: $50,000

• Fannie Mae calculation: $500/month

• Freddie Mac and FHA calculation: $250/month (0.5% of balance)

Sometimes, it might be better for your DTI to exit deferment and start making payments on an IDR plan. This is particularly true in two scenarios:

1. If your IDR payment is less than 0.5% – 1% of your loan balance, this could lower your calculated DTI and improve your mortgage eligibility.

2. If your current IDR payment is $0, it might be beneficial to temporarily increase your payment. Aim for an amount that’s still less than 0.5% of your loan balance. For example, if you have a $50,000 loan balance, a payment of $200/month would be less than the 0.5% ($250) that would otherwise be used in DTI calculations.

Recent changes to federal student loan programs have created unique circumstances that may affect your DTI calculations:

• SAVE Plan Enrollees: If you’ve enrolled in the SAVE Plan, you’ve been automatically placed in administrative forbearance due to the SAVE Plan being blocked temporarily. Your loans show as $0 payment on your credit report, but you can still access your payment schedule showing what your payment would be without the forbearance. The duration of this forbearance is currently uncertain.

• Recent IDR Applicants: If you’ve recently applied for an Income-Driven Repayment plan like SAVE, you may be in a processing forbearance. This typically lasts 60 days but could be longer due to ongoing legal challenges.

• DTI Impact: Some lenders may use the $0 payment shown on your credit report, others might use the payment amount from your accessible payment schedule, and some may default to using 0.5% – 1% of your loan balance.

• Action Steps: Obtain your payment schedule from your loan servicer showing what your payment would be without the forbearance. Given these unique circumstances, provide this documentation to your lender and ask how they’ll calculate your student loan payment for DTI purposes.

To calculate your debt-to-income ratio with student loans, follow these steps:

1. Add up all your monthly debt payments, including: Credit card minimums, car loans, personal loans, student loan payments, estimated new mortgage payment

2. Determine your gross monthly income (before taxes and deductions).

3. Use this formula: DTI = (Total Monthly Debt Payments / Gross Monthly Income) x 100

Example:

• Monthly debts: $3,800 (including estimated mortgage)

• Gross monthly income: $7,000

• DTI = ($3,800 / $7,000) x 100 = 54.3%

While we’ve covered the general rules for how student loans affect DTI, there are some special considerations and exceptions to be aware of:

• Loan Forgiveness: Some lenders may exclude student loans from DTI calculations if they’re scheduled to be forgiven within 3 years of mortgage closing. This could be particularly relevant for borrowers pursuing Public Service Loan Forgiveness or other forgiveness programs.

• Physician Mortgage Programs: If you’re a medical professional with high student loan debt, some lenders offer special physician mortgage programs. These may treat student loans differently in DTI calculations, often more favorably than standard mortgage programs.

• Non-Conforming Lenders: Some non-conforming or portfolio lenders may have their own unique policies for handling student loans in DTI calculations. These could be more flexible than standard guidelines.

• VA Loans: The Department of Veterans Affairs uses a unique calculation for student loans: 5% of the loan balance divided by 12 unless the loan will be fully paid off within 12 months of closing.

• Future Income Consideration: Some lenders may consider future income potential, especially for recent graduates in high-earning fields, which could offset the impact of high student loan debt on DTI.

• Cosigned Loans: If you’re a cosigner on someone else’s student loans, lenders may exclude these from your DTI if you can prove the primary borrower has been making payments consistently for 12-24 months.

Related: Will Cosigning a Student Loan Affect Me Buying a House?

• Enroll in an Income-Driven Repayment plan: Plans like SAVE, PAYE, or IBR can significantly lower your monthly payments based on your income, potentially reducing your DTI substantially.

• Consolidate your federal student loans: If you’ve done the math and your monthly payment under an IDR Plan would actually increase your DTI, look to consolidate your federal student loans and switch to the Graduated or Extended Repayment Plan. This will lower your student loan payments by extending your repayment period. Learn More:

• Refinance your student loans: Similar to consolidating, private refinancing might offer a lower interest rate or longer repayment term for your private student loans, reducing your monthly payment.

• Increase your income: Consider a side job, asking for a raise, or switching to a higher-paying position. Higher-income lowers your DTI even if debt stays the same and can have a dramatic effect.

• Pay off debts: Focus on paying off high-interest personal loans and credit card debts. This can quickly reduce your overall monthly debt payments and improve your DTI.

Related: First-Time Home-Buyer Student Loan Forgiveness

Student loans don’t have to derail your homeownership dreams. Whether you’re concerned about your DTI, credit score, or down payment, there are strategies to improve your mortgage eligibility.

Different types of loans have varying requirements, and lenders consider factors beyond just student debt.

Want to know exactly how your student loans affect your mortgage options? Book a call with one of our student loan experts.

We’ll review your specific situation and help you create a plan to manage your student debt while working towards homeownership.