Student Loan Forgiveness And Getting A Mortgage
Are you one of the millions who are disappointed because President Biden didn’t magically wipe away your entire student loan in his latest announcement?
Don’t despair, there’s a very good possibility that you could still qualify for a mortgage loan, even though you still have a student loan.
In fact, one of the biggest misconceptions about student loans is that it’s not possible to qualify for a mortgage if you still owe money on your student loan. In fact:
You Can Get A Mortgage Even If You Have A Student Loan
Let’s deal with several facts about student loans and mortgages that are important for you to realize.
If Your Student Loans Are On An Income-Based Repayment Plan And Your Payment Is Zero, It’s As If You Don’t Have A Student Loan At All!
Yep, you read that right. It’s possible that no matter how much you owe on your student loan, the lender could ignore it completely when considering your mortgage loan application.
This applies under the following circumstances:
- You are on an income-based repayment plan for your student loan, and your monthly payment under that plan is zero
- Your credit report shows $0 as the required monthly payment for your student loan, or your most recent student loan statement shows $0 as the required monthly payment
- You are applying for a conventional loan (not an FHA, VA, or USDA loan) and the lender is using Fannie Mae’s criteria in evaluating your loan
(Contact us if those three circumstances are true and your mortgage gets denied because of your student loan debt. We’ll be happy to help you find a lender who will do everything possible to help you get a loan!)
In other words. If your IBR payment is zero, it doesn’t matter whether you still owe money on a student loan or not – from the standpoint of a mortgage lender who correctly understands mortgage approval rules, that loan doesn’t exist!
Mortgage lenders don’t care how much you owe on your student loan, they only care about what your monthly payments are on those loans in combination with all your other loan payments.
You could literally owe $750,000 in student loans and still get a mortgage if your required payments on all of your loans (including student loans, car payments, credit card payments, etc.) are less than a certain percentage of your income.
One of the key factors in the loan approval process is your debt-to-income ratio (DTI). To calculate that, the loan underwriter will add up all of your monthly payments, including:
- Student loan payments
- Credit card monthly required payments
- Rent or mortgage payments
- Car payments
- Child support or alimony payments
- Any other personal loan payments
They will then take that total and divide it by your gross monthly income. The result is your debt-to-income ratio.
What Is An Acceptable Debt-To-Income Ratio?
Lenders traditionally look for your debt-to-income ratio to be below 36% (the lower the better,) though if you have good credit and cash reserves, some will go as high as 50%.
Again, having an income-based repayment plan, even if your required monthly payment is bigger than zero, the amount of monthly payment that shows on your credit report or monthly student loan statement will be the number they will use in calculating your debt-to-income ratio, even if it is substantially lower than the amount on your student loan contract.
Careful Debt and Credit Management Is Key
Even if you have student loan payments due every month, you can still get a mortgage if you carefully manage your debt and your credit. Avoiding and paying down your other debt can allow you to have an acceptable debt-to-income ratio that will enable you to potentially get into a home even if you still have substantial student loan debt.
Start A Conversation With A Lender Who Will Work For You
Student loan debt can be confusing and may create misunderstandings that could cause you not to buy a house when you could actually qualify.
The challenge is that not all lenders understand the rules. It’s important to work with a lender who both understands them correctly and is willing to work with you to do everything possible to get you a loan. In the end, even if you don’t qualify yet, you’ll have a better understanding of what you need to do to qualify in the near future.
Have Questions About Qualifying for a Mortgage?
We can help! You can Ask Your Question here, and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.
About the Author
Do You Have Questions About Qualifying?
Find a Mortgage Expert Near You
Find a Mortgage Expert by State