You don’t need to be 100% debt-free to buy a home, which means you can have student loan debt and be a homeowner. There are a few important things you need to understand when applying for a mortgage with student loan debt though.

How student loans are calculated in your Debt-to-Income (DTI) ratio

According to Fannie Mae and Freddie Mac, they will use the monthly student loan payment provided on the credit report for qualifying purposes. For deferred loans or loans in forbearance, the lender may calculate a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment.

Source: Fannie Mae Selling Guide and Freddie Mac Selling Guide

So how does that look in your DTI ratio? (DTI is the percentage of your monthly income that goes toward debt)

How to calculate DTI

First, you add all the monthly payments you make…

• Auto loan payment

• Minimum student loan payments

• Mortgage payment or rent

  Verify your mortgage eligibility (Dec 21st, 2024)

• Minimum credit card payments

• Insurance premiums

Then you divide that number by your total pre-tax monthly income.

Example

Proposed Mortgage: $1700

Student Loan payment: $200

Credit card payment: $100

TOTAL: $2000

Next, you divide $2000 by your total gross income, $6000. Your DTI ratio is .33, or 33%. Most lenders are looking for a DTI ratio of 50% or lower.

How to lower your DTI ratio

To instantly lower your DTI ratio is to pay down some of your other debt, like credit cards, auto loans, or personal loans. Increasing your income can also help lower your DTI ratio but you will want to keep in mind that most lenders will need a 2-year history for all your income sources. For bonuses or overtime, you must have a history of ideally 24 months to be considered stable.

Your home loan options

If your DTI ratio is lower than 50%, you may qualify for a conventional loan. These types of loans follow the Fannie Mae and Freddie Mac guidelines. An FHA loan has a little bit more flexibility with the DTI ratio, but you’ll have to pay mortgage insurance. If you’ve served in the armed forces or National Guard, you might qualify for a VA loan.

Working with a mortgage broker will give you options and a thorough pre-approval. Contact one of our Loan Officers today.

Resources:

For a free credit report visit www.annualcreditreport.com

For VA Loan requirements visit https://www.va.gov/housing-assistance/home-loans/eligibility/.