For many people, student loans are a necessary part of getting through college. However, when you apply for a mortgage, your outstanding student loans might prove problematic. Depending on the home loan program you choose and the amount of your debt, student loans may reduce your maximum mortgage amount or possibly prevent you from qualifying altogether.
Regardless of the loan program you choose, the lender won't approve your application unless your debt-to-income ratio falls beneath a certain limit. Lenders calculate your debt-to-income ratio by totaling your debts and dividing them by your gross monthly income. To obtain a conventional loan, your debt-to-income ratio must be no more than 36 percent. To obtain a loan insured by the Federal Housing Administration, your debt-to-income ratio must be less than 41 percent. If your student loans cause your debt-to-income ratio to rise above the program's threshold, the lender will deny the loan or lower the maximum amount you can borrow.
According to Fannie Mae, lenders must consider outstanding loan balances a revolving debt when processing mortgage applications, regardless of whether the loans are currently in deferment. If your student loans are not in deferment, lenders will include the full amount of your payment in your monthly debt when calculating your debt-to-income ratio. If your loans are in deferment, the lender will calculate your monthly obligation as 2 percent of the outstanding balance.
If you are currently making payments toward your outstanding loans, FHA will include the payment amount when calculating your debt-to-income ratio. However, if you can show that your loans will be in deferment for at least 12 months from the date of closing, FHA will exclude your student loans from all debt-to-income calculations, thus allowing you to qualify for a larger mortgage amount.
Because conventional mortgages require lenders to include student loans in all calculations, FHA mortgages may be a better choice for borrowers with high outstanding balances that won't become payable for at least one year. However, FHA mortgages require borrowers to pay monthly mortgage insurance, which results in a higher payment. To prove that your loans are in deferment, you must provide written evidence from the lender.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.