Wednesday, 1 December 2021

Can You Buy a House with Student Loans?

Can You Buy a House with Student Loans?
17 Jun
3:18

Updated on Wednesday, June 16, 2021

You can get a mortgage with student loan debt as long as you know the rules set by the different loan programs. Most lenders offer a variety of income-based repayment mortgage options if you’re considering buying a house with student loan debt.

How to buy a house with student loan debt

Buying a house with student loans requires you to provide copies of your student loan paperwork to your lender. However, lenders also need to see how student loan information is reflected on your credit report to determine which loan program is the best fit for you.

For example, qualifying for a mortgage if you’re on an income based student loan repayment (IBR) plan is different from buying a house with student loans in deferment. In general, you should have the following ready if you’re trying to get preapproved for a mortgage with student loan debt:

  • A copy of your income-based repayment plan
  • A credit report that shows the monthly payment for each student loan (if any)
  • A copy of the terms of repayment for all of your student loans, even if they’re deferred
  • Proof of how long your student loans are deferred if you haven’t begun repaying them

Rules for buying a house with student loan debt

Lenders look at student loans in repayment differently than if they’re in deferment. In most cases, you’ll qualify for a bigger loan if you can document some sort of payment schedule than if your loans are still deferred. Here’s how the most common home loan programs evaluate borrowers trying to get a mortgage with student loans.

Qualifying guidelines if your student loan is in repayment

Conventional Fannie Mae loans.Fannie Mae is one of two government-sponsored enterprises that set rules for conventional loans. Conventional lenders may qualify you for a Fannie Mae mortgage with student loan repayments based on:

  • The monthly payment on your credit report
  • The student loan documentation you provide
  • The payment on an income-based repayment plan, even if it’s $0

Conventional Freddie Mac loans. The rules are the same as Fannie Mae with one exception: If your IBR payment is $0, Freddie Mac lenders must use 0.5% of your student loan balance to qualify. That means a Freddie Mac conventional lender counts a payment against you even if you’re not required to make one on your current IBR plan.

FHA loans. Loans backed by the Federal Housing Administration (FHA) typically use 1% of your student loan balance to calculate your monthly payment, regardless of any income-based repayment schedule you provide. FHA student loan guidelines also require the lender to use a higher payment if it shows up on your credit report.

VA loans. The U.S. Department of Veterans Affairs (VA) guarantees VA loans, and uses the student loan payment reflected on your credit report with supporting documents. If the credit report doesn’t reflect a monthly payment, VA-approved lenders must use 5% of the outstanding student loan balance and divide it by 12 to assess the monthly payment counted against you for the loan approval.

USDA loans. The U.S. Department of Agriculture (USDA) insures loans for low- to moderate income borrowers buying homes in designated rural neighborhoods across the country. Lenders may use the student loan payment on a USDA borrower’s credit report or on their student loan servicer paperwork. Some USDA-approved lenders may use a 0.5% monthly payment calculation if your loan is on an IBR plan.

Qualifying for a mortgage if your student loans are in deferment

Getting a mortgage with a deferred student loan can be a little tricky. Lenders still have to count a payment against you which may have an effect on how much of a loan you qualify for. The table below shows how each loan program calculates your deferred student loan payment.

Loan program Minimum student loan calculation for deferred loans Special exceptions
Conventional Fannie Mae 1% of your outstanding loan balance None
Conventional Freddie Mac 0.5% of your outstanding loan balance None
FHA loans 1% of your outstanding loan balance None
VA 5% of your outstanding loan balance divided by 12 No monthly payment counted if repayment does not begin within 12 months of closing
USDA 0.5% of your outstanding loan balance None

Pros and cons of buying a home with student loans

Pros

  • You’ll be able to start building equity as a homeowner sooner
  • You may benefit from tax-deductible mortgage interest if your earnings are rising
  • You may be able to qualify with $0 IBR payments if your income is lower

Cons

  • You’ll probably qualify for a lower loan amount if you can only meet government-backed credit requirements
  • You may need to make a bigger down payment or pay off other debt to qualify
  • Your home payment could become unaffordable once you’re making full student loan payments

Which loan program should I choose for buying a house with student loans?

There are a number of factors to consider when you’re choosing which program is best for homebuying with student loans.

Loan program

This type of home loan makes sense if:

Conventional Fannie Mae loan
  • You have at least a 620 credit score
  • Your total debt is 50% or less of your income
  • You can make a 3% down payment
  • You have an IBR payment of $0
Conventional Freddie Mac loan
  • You need the extra flexibility of a co-borrower who won’t living in your home
  • You’re using sweat equity for a down payment
  • You qualify with a payment based on 0.5% of your student loan balance
FHA loan
  • Your credit scores are 580 with a 3.5% down payment
  • Your credit scores are 500 with a 10% down payment
  • You qualify with the 1% minimum student loan requirement
VA loan
  • You’re an eligible military borrower
  • You have a credit score of at least 620
  • You don’t want to make a down payment
  • Your student loans are deferred at least 12 months
  • You qualify with the minimum student loan payment required by the VA
USDA loan
  • You meet the low- to moderate-income requirements set by the USDA in your area
  • You’re buying a home in USDA-designated rural area
  • You don’t want to make a down payment
  • Your credit score is at least 640
  • You qualify with the minimum student loan payment required by the USDA

Source: https://www.magnifymoney.com/blog/mortgage/now-easier-millions-student-loan-borrowers-get-mortgage1275293926/

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