Below is a table showing how your DTI is calculated depending on the type of mortgage. There are niche situations where the rules vary. So use this only as a guideline and always ask your lender about your situation.
Harder to save for a home
Between the down payment and closing costs, the average homebuyer needs to come up with tens of thousands of dollars for these upfront costs. On top of that, you’ll have other expenses, such as moving costs and building an emergency fund to cover unexpected repairs. Student loan debt makes this part of the homebuying process even harder.
A 2017 Federal Reserve study showed that for every $1,000 in student loan debt, homeownership was delayed by an average of 2.5 months. So it’s having a big impact on when borrowers are able to afford a home.
Student loans will appear on your credit reports and impact your credit score. If you miss payments or make late payments, that will have a negative impact on your credit score. A lower credit score not only makes it harder to get approved for a mortgage, but can also increase the mortgage rate you qualify for.
How missed payments are treated is different depending on if you have private or federal student loans. “With private loans, if you miss a payment or you miss several and you’re put into collections, then they’re going to click for more info be treated just like any other late payment or collections account,” Seagraves says. “But when we get into defaults or missed payments on government student loans, that’s when things get really tough.”
The U.S. Department of Housing and Urban Development (HUD) maintains a database of all Federal debt, known as the Credit Alert Verification Reporting System (CAIVRS). If you’re delinquent on any Federal debt, such as Federal student loans, it’ll appear in this database. And you’re unlikely to be approved for any government-backed loan until you make up for the missing payments and are back into a repayment plan.
How to Qualify for a Mortgage With Student Loans
Getting a mortgage while you have student debt may be tougher than if you didn’t have any debt, but there are steps you can take to increase your chances.
The most important thing to do is to make sure your loan payments are current. Paying your student loans on time will help to increase your credit score over the long haul.
And there are ways you can minimize the impact student loans have on your DTI and your ability to save up to buy a house.
Decrease your DTI by getting into repayment
If you’re currently not in active repayment for your student loans, that can have a big impact on your DTI. This is especially true if you have a high loan balance.
Let’s say you have $80,000 in student loans and are applying for an FHA loan. If you’re in forbearance, your DTI calculation will include 1% of your student loan balance, or $800 a month. However, you may have repayment options that are significantly less than $800 a month. “If we just took [the borrower] out of a paused payment and put them into repayment, they could actually use federal programs to reduce their payment and now qualify [for a mortgage], based on a lower active payment,” Kaiyoorawongs says.
So if you’re currently taking advantage of the universal federal student loan forbearance, but can afford not to, you may be able to lower your DTI by entering repayment. However, you can’t just start making student loan payments and have that amount count toward your DTI, even though your lender will gladly accept your money. “To get into repayment, you actually have to file paperwork,” Kaiyoorawongs says.