2023 Guide to Qualifying for a Mortgage with Student Loans (2024)

When you have student loans, qualifying for a mortgage can get tricky.

COVID-19 UPDATE: Federally serviced student loans were put into automatic administrative forbearance until June 30th, 2023 through executive actions and rulings by the Biden administration.

If your payments were automatically withdrawn from your bank account, that has also been suspended. If you are trying to qualify for a mortgage and you have an IBR or IDR payment plan, forbearance could present a problem.

If this happens to you, it’s not difficult to correct.

Additional Reading: COVID-19 Student Loan forbearance, Will it Hurt My Home Loan Approval?

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Income-Based Repayment Plans

Your student loan payments may be deferred or in forbearance. If your loans are deferred, you have no payments due.

When you begin to make payments on your student loans, you may have several options.

You may be making payments on your student loan based on your income. This is called an Income-Based Repayment (IBR) plan.

IBR plans typically will not cover the principal and interest due, and the loan balance may increase even though you are making payments.

If your payment is based on a calculation that pays off your loan in full at the end of the loan term, this is an amortized payment.

All underwriting guidelines with all lenders will allow you to use an amortized payment when calculating your debt to income ratio.

IBR plans could also leave you with a $0.00 payment, even though your loan is in repayment status. Your income is reviewed every year to determine your new payment over the next year.

Student Loan Payment Change History

More and more students are straddled with student loan debt for years after leaving school.

Being chained to student loan debt requires an experienced locksmith to unlock the correct guidelines to get you approved for a home loan.

It’s almost a full-time job keeping up with the updates to the underwriting guidelines, and IBR payments seem to send many loan officers into a tailspin of misinformation.

Student Loan Guideline Changes Since 2015

• 2 times for Fannie Mae Conventional Loans
• 3 times for Freddie Mac Conventional Loans (January 2020 most recent)
• 3 times for FHA Insured Loans (July 2021 most recent)
• 2 times for VA Guaranteed Loans
• 2 time for USDA Guaranteed Loans

The first major change to the underwriting guidelines happened when lenders were no longer allowed to ignore deferred payments or loans in forbearance.

The second major change was that you had to apply a payment to any student loan balance. If the payment reporting on your credit report will not pay off the loan at the end of a fixed term, your payments are not amortized.

Non-amortized payments became public enemy #1 by Fannie Mae, FHA, and USDA. In 2015, Freddie Mac guidelines did not allow for deferred payments or loans in forbearance and would allow IBR payments, even if the reported payment is $0.00.

Calculating Your Debt to Income Ratio (DTI)

The entire student loan debacle is being caused by confusion around how your debt to income ratios are calculated.

Your debt to income ratio is calculated as your proposed housing payment (when buying a home) plus your monthly liabilities from your credit report, as a percentage of your gross income.

When using a Fannie Mae or Freddie Mac Conventional loan, the total housing payment plus monthly liabilities cannot exceed 50% of your gross income, or a 50% DTI.

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Borrowers using an FHA mortgage have 2 DTI ratios. A front-end debt to income ratio is your housing payment as a percentage of your income. A back-end debt to income ratio includes your monthly liabilities from your credit report.

FHA will allow your housing payment to be as high as 46.99% front-end DTI, and a maximum 56.99% back-end DTI including your debts.

Student loans become confusing when no payment is reported on your credit report, or when your payment is an Income-Based Repayment (IBR) payment.

Video: How to Qualify for a Mortgage with Student Loans

Josh Lewis, Scott Baade, and Scott Schang recently had this discussion live. Watch the video or read the transcript here.

2022 Student Loan Guidelines Snapshot

FHA Student Loan Guidelines 2022

The FHA now requires one of the following criteria to be used to determine how much student loan debt repayment to include in the calculations to qualify for an FHA mortgage loan:

• The amount that appears on the student’s credit report (if it is above $0)
• The actual payment amount that appears on the student loan documentation
• If the credit report shows $0, the lender can use 0.5% of the loan balance as the required payment (this was reduced from 1% in June of 2021)
• If you are on a repayment plan that allows for payments lower than appear in your credit report (for example, you are on an IBR or other payment program that allows for lower payments than your original loan documentation) the lender can ask for documentation from your student loan servicer. Once that amount is confirmed, they can use that lower number, as long as it is not $0. If the IBR payment is $0, the lender will use 0.5% of the loan.
• The lender can exclude student loan payments entirely if you can provide written documentation from the student loan servicing company that the loan balance has been forgiven, discharged, canceled, or otherwise paid in full.

Application Examples – FHA Loan Guidelines For Student Loans

• Payment Is Listed On Credit Report: Jacob owes $150,000 on his student loan. His credit report shows his monthly payment as $200. The lender will use the $200 documented number
• Payment Is Not Listed On Credit Report, Or It Is Listed As $0 On The Credit Report: Hailey’s balance on her student loans is $100,000, but her credit report shows $0 as her monthly payment. The lender will use 0.5% of the $100,000 remaining balance as the required payment amount ($100,000 * .005 = $500)
• Loan Is In Deferment Or In IBR Status: Skylie owes $200,000 on her student loan, but her payments are currently in deferment because she is part of the IBR program, and her income-based payment is currently $100 per month. The loan officer will use 0.5% of $200,000 = $1000 unless Skylie can show written confirmation from her loan servicer that her current payment is $100. As long as her IBR payment is greater than $0, they can use that amount. If the IBR payment is $0, then they will use 0.5% of her income for mortgage qualification.

Conventional Loan Guidelines 2023: Student Loans

Conventional loans (loans not guaranteed by the government through programs like FHA, USDA or VA) tend to use either Fannie Mae’s Freddie Mac’s guidelines.

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2023 Fannie Mae Conventional Loan Guidelines For Student Loans:

• If the student loan payment is shown on the credit report, they use that amount
• If the student loan payment is not shown on the credit report, or if it appears as $0 on the credit report, they use the amount shown on the student loan documentation (the most recent student loan statement is acceptable)
• If the student is on an IBR (income-based repayment) plan, that amount will show up on the most recent student loan statement and that amount should be used. If the monthly payment shows on that statement as $0, they can use $0
• If the loan is deferred or in forbearance, the lender should use 1% of the outstanding loan balance or calculate a payment rate based on the student loan documentation showing repayment terms.

2023 Freddie Mac Conventional Loan Guidelines For Student Loans:

• If the student loan payment is shown on the credit report or other student loan documentation is greater than $0, they use that amount
• If the student loan payment on their credit report is $0, they use 0.5% of the outstanding loan balance (as shown on the credit report)
• If the student has 10 or fewer monthly payments left until the full balance of their loan is paid off, forgiven, cancelled, discharged, or in case of an employment contingent repayment program – paid off, the lender can use $0 as the monthly payment required*
• If the loan is deferred or is in forbearance and the loan will be forgiven, cancelled discharged or considered paid at the end of the deferrmant or forbearance period, the lender can use $0*

* unless the lender is aware of any circ*mstances where the student will not be eligible for those programs. Evidence of eligibility must come from the student loan servicer or the employer.

VA Student Loan Guidelines 2023:

• If the student loan will be in deferment for at least 12 months after the mortgage is secured, they can use $0
• If the student loan repayment amount is shown on the credit report, they use that number
• When no payment amount is reported or available, the lender will use 5% of the current balance divided by 12 to determine the payment
• If the student is in an IBR program, and their payments under that program are fixed for at least 12 months, they can use that amount. (It’s difficult to qualify for this because IBR payments are reevaluated every year, so you would need to get your loan at the same time as your IBR evaluation to qualify using this standard.) If the IBR payments are not fixed for the next 12 months, they will use 5% of the current balance divided by 12

USDA Student Loan Guidelines 2023:

• If the loan is fixed – payments are consistent, the interest rate is consistent and the repayment term is fixed, the lender will use that repayment amount
• If the loan is not fixed – it is adjustable, deferred, income based repayment (IBR), graduated or income contingent (IC), the lender will use one of the following:
  • When the payment amount is $0, the lender will use 0.5% of the loan balance from the credit report or loan documentation as the loan payment amount
  • When the payment is above $0, the lender will use the approved repayment amount shown in the loan documentation
• If the loan is in a forgiveness plan, the lender will use the applicable documented payment until the loan is released as a liability
• If the loan is in the name of the student but being paid by someone else, it remains a legal obligation of the student, so payments must be included in the monthly payment amount even if they aren’t making those payments.

Why Lenders Get it Wrong

If you’re calling from a TV, radio, or internet advertisem*nt, you are most likely to be connected to a call center, with little to no actual mortgage experience.

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I call these “big box” lenders. These lenders are amazing at processing a certain type of loan file that does not require anything too far outside the box.

Student loan payments are not so far outside the box, but the timing for when these issues are found could not be worse.

If you are working through a big box lender call center, your application is not getting in front of a professional until it reaches the underwriter.

The underwriting guidelines for student loans, and specifically income-based repayment plans, have changed several times over the past 2 to 3 years.

Many times, your file is not in front of the underwriter until after you’ve already accepted your purchase offer and paid for the appraisal.

Hopefully, there’s enough time, and the underwriter is experienced enough to look up the guidelines and can figure out how to save your new home by getting you approved for the right loan.

I wouldn’t believe this happens as much as it does if I hadn’t experienced it personally! We first covered this topic in 2015, and have answered hundreds of IBR questions from buyers across the Country.

So many of these horror stories we hear could have been avoided if a professional loan officer was used, and not a call center lender.

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