So many people come out of college with student loans – whether you have graduated or not! Depending on your income you may not have to make payments right away or they may be deferred if you are still in school. I get a lot of calls from clients that want to buy a home but have student loans. Frequently they will say "but I do not have to make payments on them now".
We have to use a payment when we qualify you. It may be 1% of the balance of the loan or maybe the payment on the credit report. It can vary within different programs depending on the status of your student loan. Remember, you will need to pay back the student loan at some point, so you want to make sure your house payment doesn't affect your ability to pay your student loan. The only program that still allows us to omit the payment if the loan is deferred is a VA loan and the payment has to be deferred for at least 12 months from the closing date.
The amount we use will vary based on the type of loan and whether we know the repayment terms. Here are some of the ways we calculate the payment:
FHA – the actual payment on the credit report – as long as it will amortize the loan over it's term. This means IBR (income based repayment) payments will not work. We have to use the higher of 1% of the balance or the amount on the credit report – whichever is higher. If the payment on the credit report will amortize in the terms of the loan, we can use it.
Conventional loans – Fannie Mae – We need to use the actual payment as long as it will amortize over the life of the loan. If we do not know the payment, we need to use 1% of the balance. For Freddie Mac loans, we can use what is on the credit report or a documented payment from the loan servicer. If we do not have a payment, we need to use 1% of the outstanding balance.
VA loans – we need to use the credit report payment or the documented payment from the servicer. If we do not know the terms of the loan, we have to use 2% of the outstanding balance.
USDA loans – Higher of 1% of the balance or the payment on the credit report or documented payment from the loan servicer. If we do not know the loan terms, we need to use 1% of the outstanding balance.
For some people this can make a huge difference in what they can qualify for. Many may have a credit report with minimal payments on the student loans, if the loan officer does not catch it in the beginning, it may mean the difference between an approval and a denial from underwriting. Make sure you talk to your loan officer about your student loans and how it will affect your loan approval!