How can student loan debt affect your mortgage qualification?

Student loans are a big deal these days!  Most people going to college are taking out at least some student loans.  In 2013, the average student that used student loans graduated with over $28,000 in student loan debt.  So how will that affect your mortgage qualification?

Every lender looks at your total income and your monthly payments on installment and revolving debt.  Student loans may be deferred for a while to give you time to get a job.  However, we have to use the payment against you even if it's deferred.  There are a couple situations where we may not have to use the debt – one is FHA.  If we can show that the monthly payment is deferred for at least 13 months (a full year after you close), then we do not have to use that payment in qualifying.  

Fannie Mae changed their rules on student loans and we need to use the actual payment or 1% of the balance, whichever is higher.  So frequently I need to increase the monthly payment that is on the credit report and that can definitely make a difference in qualifying!  Freddie Mac does not have that requirement – at least not yet!

When you looking for homes and figuring out what you do qualify for, you do want to take into consideration what that student loan payment will be.  Even if we do not have to use the payment against you, you will have to start paying back the loan and it may affect what you can afford.  You may want to look at trying to lower the balance before you start house hunting.  You may also want to make sure you know what your payment will be so you are comfortable with both the student loan payment and the new home payment!

Student loans are a great way to help pay for college, but you do need to remember to pay them back.  The other problem we see with student loans is that you may think there is only one loan, but usually there is one loan reported for each year.  So if you take out a new loan each year, it may only require one payment overall, but it's reported on your credit report as 4 or 5 loans.  So if you make one late payment, it will show as 5 late payments on your credit report.  That can easily affect your credit score and the interest rate that you get for your mortgage.

Since it's that time of year where many are graduating from college, remember that you may have student loans that you need to pay. If you know you will be struggling, contact the student loan servicer and ask for help before you have late payments.  They may be able to give you some assistance to help you with lower payments in the beginning!   When you start house hunting, you will want to make sure you keep any future increases in mind as you look at homes.

Leslie Vanderwerf,  NMLS ID#335509, American Mortgage & Equity Consultants, NMLS#150953 - Email - Website

Written By

Currently a Senior Loan Officer at Cross Country Mortgage LLC, it's hard to believe I have been in the mortgage business for more than 25 years and have worked with Sharlene since 2000! I love sharing mortgage insights here each week and helping people finance their homes. Listening helps me find the right program for you!

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