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USDA Qualifying for a Mortgage with Student Loans

How to Qualify for a USDA Mortgage with Student Loans

USDA Mortgage for Purchase or Refinance

Like many Americans trying to buy a new home or take advantage of a lower interest rate, if you have student loans, you might be running into more trouble than you were expecting.

You may have already received conflicting information about your home loan options, or how your student loans are calculated when qualifying for a USDA loan.

It is not uncommon for inexperienced loan officers to use the guidelines of one loan program, like FHA, and incorrectly apply them to your USDA loan application.

We’re going to set the record straight today by talking about student loan guidelines when trying to qualify for a USDA mortgage.

2020 Guide to Qualifying for a Mortgage with Student Loans

USDA Student Loan Guidelines

An underwriter following USDA mortgage guidelines is looking at the payment type on your student loans.  Either you have a fixed payment or a non-fixed payment.  Here’s what USDA says about how to calculate your payment for debt to income ratio purposes.

Fixed payment loans: A permanent amortized, fixed payment may be used in the debt ratio as long as you can provide documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed. The fixed payment will fully amortize/pay in full the debt at the end of the term.  

Non-Fixed payment loans: Payments for deferred loans, Income-Based Repayment (IBR), Income-Contingent (IC), Graduated, Adjustable, and other types of repayment agreements which are not fixed must use the greater of the following: 

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  1. One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, or 
  2. The current documented payment under the approved repayment plan with the creditor.  

Student loans in your name alone but paid by someone else remain the legal responsibility of you, and the monthly payment will be calculated as part of your debt to income ratio.

Student loans in a “forgiveness” plan/program remain your legal responsibility until you are released of liability from the creditor. The applicable payment must be included in the monthly debts. 

2020 Guide to Qualifying for a Mortgage with Student Loans

Why Do Lenders Get it Wrong?

In our 2020 Guide to Qualifying for a Mortgage with Student Loans, you’ll read hundreds of stories from readers of this website about inexperienced loan officers and lenders that get it wrong.

It’s heartbreaking to think that the folks that found us are just a small sample of what is probably a much bigger number of people that believed the loan officer when they said no, giving up on the dream of homeownership or a lower interest rate.

The simple fact of the matter is that there are different rules for qualifying for a mortgage with student loans depending on what kind of loan you’re applying for, and what kind of payment plan you have.

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Your qualifying options are often limited to the experience of the loan officer that you’re talking to. So, the next logical question is, how do you avoid having your options limited?

If you called your lender from an online internet ad, TV or radio commercial, then you are more often than not speaking to someone in a call center with little to no actual experience looking up underwriting guidelines.

Working with an Expert

We have been helping home buyers and homeowners qualify for a mortgage with student loans since 2015 when the major challenges we face today were first introduced.

Find My Way Home is an Expert Network of experienced mortgage professionals, here to answer your questions, and put you on the right path.

2020 Guide to Qualifying for a Mortgage with Student Loans

You can get your questions answered by either giving us a little more information here, and we will match you with a loan officer who is an expert with student loan guidelines, or you can leave a comment or question below.

We do not sell your information to multiple lenders and hope you find someone experienced, we will introduce you to one loan officer that we know and trust that can help.

Any question that you ask below, I will personally answer, and if needed, we can introduce you to a professional, experienced loan officer that I know can help.

About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • Demetra Ladson says:

    I have 175k in student loans and I’m under the IDR but my lender said USDA still requires to calculate the .5%, is that correct?

    • Scott Schang says:

      Hi Demetra, yes, that is correct. USDA updated their guidelines in September 2019 to allow the .5% instead of using a 1% calculation for any “non-fixed” payment. Here is an excerpt from the updated guideline:

      UPDATED 9-24-2019 – Temporary Modification of Section 11.2 of HB-1-3555 pertaining to Student Loans.

      USDA has updated its guidance regarding the student loan payment requirement. The new guidance specifically affects the required payment utilized for Non-Fixed student loan repayment plans.

      Student loans. Lenders must include the payment as follows:
      o Fixed payment loans: A permanent amortized, fixed payment may be used in the debt ratio when the lender retains documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed.

      o Non-Fixed payment loans: Payments for deferred loans, Income-Based Repayment (IBR), Graduated, Adjustable, and other types of repayment agreements that are not fixed cannot be used in the total debt ratio calculation. The higher of one-half percent (.50%) of the loan balance or the actual payment reflected on the credit report must be used as the monthly payment in the underwriter decision. No additional documentation is required.

      The change—highlighted above—removes the requirement that non-fixed payment loans are calculated using one percent (1%) and inserts the use of one-half percent (0.5%) or the payment reflected on the credit report, whichever is greater.

      Currently, you options for using your IDR payment are Conventional, Fannie Mae or Freddie Mac underwriting guidelines, or FHA guidelines as of July, 2021.

      If you would like me to introduce you to someone I know and trust that has experience with these guidelines, feel free to email me at scott@findmywayhome.com and let me know what State you’re buying in.

      Hope this helps?

  • Rose St. Fleur says:

    I have $76k in student loans which include the interest that has built up. If they use the 1% rule in knocks me out of the DTI. Right now, I currently have a prequalification of $135k FHA, which in today’s market really gets me nowhere. I’ve been told condos aren’t allowed on FHA and that they ask for 20% down for condos anyway. What are my choices or options in become a Very First Time Home Buyer? Please help!

    • Scott Schang says:

      Hi Rose. Some condos do not meet the qualifications for FHA, but most condos simply fell out of “compliance” due to changes in the guidelines years ago. It’s possible to use an FHA loan with a condo, and it doesn’t require 20% down – only 3.5%

      The challenge is that FHA is always going to require that you use the 1% calculation for your student loans.

      When you use a Conventional loan, with as little as 3% down payment, you can use your income-based repayment as long as you are in a repayment plan.

      If you would like, you can shoot me an email at scott@findmywayhome.com and let me know what State you’re in. I can introduce you to someone that I know and trust that has experience with these guidelines and specializes in helping first-time buyers.

      I hope this helps?

  • Jodene Bullis says:

    I have huge student debt, I am and have been on the PAYE program in which my payment has been $0.00 for the last 10 years or so. These loans if calculated at the 1% the monthly payment would be 1700.00 a month which excludes me from mortgage loans. Would it be in my best interest to have these loans drop off my credit report or would that hurt my score to bad? my score currently is 810. I have looked into this and because my loans are the age they are and they have been accumulating huge amounts of interest when they should not have been I can dispute them. What is your thought on this?

    • Scott Schang says:

      Hi Jodene, first of all, you DO NOT have to use a 1% payment when following Fannie Mae’s underwriting guidelines. Especially with an 819 credit score.

      Are you eligible for the Public Service Loan Forgiveness program?

      I’m not sure how to dispute the loans. And if you have a $0 payment, there’s no need to do anything with those loans.

      Hope this helps?