VA Student Loan Guidelines: How to Calculate Loan Payments

• Your VA loan eligibility is heavily influenced by your debt-to-income (DTI) ratio, which includes your student loan payments. You should aim for a DTI of 41% or lower to improve your chances of approval.

• When calculating your student loan payments, VA lenders will use either your credit report payment or 5% of your loan balance divided by 12, whichever is higher. Understanding this calculation can help you better predict how your student loans will impact your VA loan application.

• You can improve your VA loan approval odds by managing your student loans strategically. Consider options like income-driven repayment plans or timing your application during loan deferment periods to potentially lower your DTI ratio.

Qualifying for a VA home loan while managing student debt can be challenging. The VA requires lenders to include your student loan payments when calculating your debt-to-income ratio, which affects your loan eligibility. Whether your loans are in repayment or deferred, understanding how the VA calculates these payments can significantly impact your loan application process.

This guide breaks down the VA’s rules for student loan payments and their impact on mortgage qualification. It explains how loans affect DTI and outlines steps to improve the chances of qualifying for a VA loan.

Related: Buying a House With Student Loan Debt

When applying for a VA home loan, your DTI ratio is key for eligibility. VA lenders typically approve loans for applicants with a DTI of 41% or lower.

Your DTI calculation can significantly impact whether your student loans are in repayment or deferment. This ratio compares your monthly debt payments to your gross monthly income, providing lenders with insight into your ability to manage additional debt.

If your loans are in repayment, lenders will factor in your monthly obligation.

If your loans are deferred for at least 12 months beyond a VA Loan closing, they’ll be excluded from the DTI calculation. This exclusion can improve the chances of qualifying for a VA Loan for borrowers still in school or recently graduated by reducing their calculated monthly debt obligations.

Note: For borrowers with deferred student loans, Freddie Mac guidelines calculate a percentage of the loan balance even for deferred loans.

Related: Can You Buy a House With Student Loans in Deferment?

VA-approved lenders calculate your monthly payment for loans in repayment using one of two methods:

• Credit Report Payment: If the monthly payment on your credit report exceeds 5% of your loan balance divided by 12 months, the lender will use this amount.

• 5% Threshold: If the payment shown on your credit report is lower, lenders calculate 5% of your loan balance and divide it by 12 months to determine your monthly obligation. Unlike VA loans, FHA student loan guidelines typically use 0.5% of the loan balance to calculate payments, depending on the loan status.

Example: For a $30,000 student loan balance, 5% equals $1,500. Dividing that by 12 results in a $125 monthly payment. If your credit report shows a higher payment, such as $150, the lender will use the higher amount in the DTI calculation.

The VA Circular Student Loan Payment Rules, detailed in VA Circular 26-17-02, issued on January 23, 2017, fully explains this policy.

The guidelines require lenders to use the higher of the actual payment or 5% of the loan balance divided by 12 months when assessing student loan obligations for mortgage qualification.

Navigating the VA loan application process while managing student loan debt can feel overwhelming. But there are steps you can take to prepare and improve your chances of approval. Here’s how to manage your student loans for a smooth VA mortgage application:

1. Review Your DTI

• Before applying for a VA loan, calculate your DTI ratio by comparing your monthly debt payments, including student loans, to your gross monthly income. VA lenders typically prefer a DTI of 41% or lower.

• Tip: If your DTI is close to or exceeds 41%, consider reducing other debts or consolidating your student loans to lower your monthly payments.

2. Gather Documentation

• Lenders need accurate information about your student loan payments. If your loans are in deferment, provide written documentation confirming that the deferment period will extend for at least 12 months beyond the closing date.

• Tip: Get a statement from your student loan servicer, dated within 60 days of your loan application, confirming your current payment terms or deferment status.

3. Consider Income-Driven Repayment Plans

• If your current student loan payments are high, consider switching to an income-driven repayment plan (IDR) to lower your monthly obligation. This can reduce your DTI and improve your chances of qualifying for a VA loan.

• Tip: If you’re currently in a standard repayment plan, speak with your loan servicer about switching to an IDR plan and get confirmation of your new monthly payment.

Related: First-Time Homebuyer Student Loan Forgiveness

4. Plan for Timing

• If you’re still in school or recently graduated, and your loans are deferred for more than 12 months, applying for a VA loan during this deferment period can improve your chances of loan approval. Deferred loans are typically not counted towards your debt-to-income ratio, potentially enhancing your eligibility for the loan.

• Tip: Consider timing your application to take advantage of deferred loan payments, as these may not impact your DTI ratio.

Managing your student loans while applying for a VA home loan can be challenging, particularly regarding their impact on your DTI ratio. Understanding how your loans factor into VA loan eligibility can help you prepare for the mortgage process.

Our student loan experts can help you explore options to reduce your monthly payments and improve your DTI. Consider booking a call to discuss possibilities like consolidation or income-driven repayment plans, which may help you move forward with your VA home loan application.