A growing number of people are currently dealing with student loans.  Some are making the maximum required payments, and others may be paying as part of an income based repayment plan. Others may have their loan in forbearance, or deferment. If you are not currently paying the full payment, the amount required to be included in the debt ratio for qualification may come as a surprise.

For that reason, I am going to take you through each loan product, outlining the guidelines we are required to follow regarding student loans.

FHA
Your mortgage lender is required by law to use the greater of 1% of the outstanding balance on the loan or the monthly payment reported on the credit report OR the actual documented payment, provided it is fully amortized.

CONVENTIONAL
Great news!  Fannie Mae and Freddie Mac have relaxed regulations regarding student loans for a conventional home loan.  The guidelines used to be the same as FHA, but now we are able to use whatever the payment says on your credit report, as long as there is a payment recorded. If there is no payment, or the payment is $0, the lender will use either 1% of the outstanding student loan balance, or a fully amortized payment.

USDA                    
Again, similar to above, we have to use the greater of the following:

  1. One percent of the outstanding balance
  2. The verified, fixed payment reflected on the credit report

VA

VA loans are a little different.  Unlike any of the other loan options, if a student loan is deferred at least 12 months beyond the closing date, we do not need to include any monthly payment.

However, if a student loan is in repayment or scheduled to go into repayment at least 12 months before the closing date, we calculate the payment as follows.

Calculate each loan at a rate of 5% of the outstanding balance, divided by 12 months.

  • Calculate each loan at a rate of 5% of the outstanding balance, divided by 12 months.
  • Example: $25,000 student loan balance x 5% = $1,250.  $1250/12 = $104.17.
  • So the student loan monthly payment we would use is $104.17.

The payment(s) reported on the credit report for each student loan(s) must be used if the reported payment is greater than the threshold payment calculation above; OR
If the payment reported on the credit report is less than the threshold payment calculation above, the loan file must contain a statement from the student loan service that reflects the actual loan terms and payment information for each student loan(s). The statement(s) must be dated within 60 days of VA loan closing

We know this can be confusing, especially if you don’t know what loan product is best for you.  But rest assured, you don’t have to try to understand it alone.  Call us today and we can discuss it with you. – We are here to help!

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