How to Qualify for a USDA Mortgage with Student Loans
Table of Contents
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 and incorrectly apply them to your USDA loan application.
We’ll set the record straight today by discussing student loan guidelines when trying to qualify for a USDA mortgage.
USDA Student Loan Guidelines
An underwriter following USDA mortgage guidelines looks 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 that are not fixed must use the greater of the following:
2020 Guide to Qualifying for a Mortgage with Student Loans
- One-half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, or
- The current documented payment is 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.
Biden’s 2022 Student Loan Forgiveness Rule Changes
Many students, hoping to have their student loans forgiven, were disappointed by President Biden’s announcement that only $10,000 or $20,000 would be forgiven depending on their income and pell grant status.
But what almost every missed was the changes in the student loan payment rules that accompanied that announcement.
Changes that can significantly reduce your monthly loan payments. See our complete analysis of the student loan forgiveness rules for more details.
Why do I bring this up?
USDA Student Loan Calculation
Because this will apply directly to the USDA rule number 2 cited above:
- The current documented payment is under the approved repayment plan with the creditor.
The rule changes associated with the student loan forgiveness rules will reduce the “current document payment” plans for millions of student loan recipients, making many of them eligible for mortgages that weren’t before.
We strongly encourage you to contact your student loan provider to discuss your status, to see if you are eligible for payment reductions based on these new rules.
USDA DTI Limits (Debt-to-income)
When an underwriter looks at your application for a USDA loan, they’re looking for your dti ratio (debt-to-income) to be at or below 41%. That’s the maximum dti the USDA allows.
DTI is calculated by combining all of your monthly debt payments (student loan, mortgage, credit card payments, car payments, rent, etc.), adding them up, and dividing them by your income. If the result of that calculation is more than 41%, your loan will probably be rejected.
That’s why your student loan payment is so important because, for many student loan holders, that amount is a large portion of their required monthly payment. If we can reduce it (through being part of an income-based repayment program, for example,) that can go a long way towards enabling you to qualify for a mortgage.
Get Introduced to a Student Loan Mortgage Expert Now
Why Do Lenders Get it Wrong?
In our Guide to Qualifying for a Mortgage with Student Loans, you’ll read hundreds of stories from 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.
USDA Underwriting Guidelines
The simple fact 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.
And the USDA Underwriting Guidelines are different than bigger programs that most lenders regularly use, like FHA, VA, or conventional loans.
But more lenders never take the time to figure out those differences. So when you talk with them, they give you the wrong answers.
We don’t. Bluntly speaking, we’re experts in this stuff, and we’d like to help you get into a mortgage and a home.
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 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.
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 can help.
Any questions 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
Do You Have Questions About Qualifying?
Have Questions or Comments?
Im a bit confused for the USDA loan when would a lender choose to use the .05 percent vs the documented payment under the approved repayment plan with the creditor?
My current loans are in 0.00 but it also notes on my statement what my payment will be after the forgiveness is over.
Is it at the discretion of the underwriters?
Hi Tiffany, unfortunately this is a USDA rule. Fannie Mae conventional is the only underwriting guideline that will allow a $0 payment if it is in a repayment status, under an income based repayment plan. Everyone else requires a fully amortized payment or or .5% of the balance.
Are your student loans in an income based repayment plan now? Or are you still in administrative forbearance since COVID?
If you’re in a COVID administrative forbearance, you payments will be required to start up again in about 45 days – or 60 days from the passing of the debt ceiling by Congress.
It’s possible that an underwriter will accept your payment knowing that it is going to start again in 45 days.
Feel free to email me at Scott@findmywayhome.com if you have further questions or would like help finding someone that might be able to assist.
Hope this helps?
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?
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?
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!
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?
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?
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?