How to Qualify for a VA Home Loan with Student Loans
VA Home Loan for Purchase or Refinance
If you are eligible for the VA home loan benefit and you are carrying 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 VA home 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 VA loan application.
We’re going to set the record straight today by talking about student loan guidelines when applying for your VA home loan benefit.
VA Loan with Student Loan Guidelines
VA home loan underwriting guidelines leave many decisions up to the underwriter to act in the best interest of the Veteran and approve a loan for them without putting them at a higher risk of default.
VA’s approach to factoring in student loan payments is very similar to how they approach other qualifying guidelines. Qualifying for a VA loan with student loans will depend on two things, is there a payment? Or is there not a payment?
Where VA loans shine is when you do not have a documentable payment, there is a formula for calculating a payment which is much less than the 1% that other programs require.
How to Calculate a Student Loan Payment
DEFERRAL EXCLUSION: If you (the Veteran) or other borrower provides written evidence that the student loan debt will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered.
NO PAYMENT FORMULA: If your student loan is in repayment or scheduled to begin within 12 months from the closing date of your VA loan, the lender must consider the anticipated monthly obligation using the following formula.
- No Payment Formula: Student Loan Balance x 5% / 12
Calculate each loan at a rate of 5 percent (5%) of the outstanding balance divided by 12 months
- $25,000 student loan balance
- x 5% = $1,250
- divided by 12 months
- = $104.17 per month
This is the monthly payment for debt ratio purposes, which comes out to just under .42% of the student loan balance.
REPAYMENT PLAN DOCUMENTATION: Simply enough, your student loans are in repayment status, but you’re making a payment that doesn’t necessarily pay off the loan at any specific point in time.
Essentially, if your student loans are in repayment, but are not fully amortized to pay off at the end of a fixed term, you simply need to document that you are complying with the terms of your repayment agreement.
The underwriter must use the payment(s) reported on the credit report for each student loan(s) if the reported payment is greater than the threshold payment calculation above.
ZERO PAYMENT EXCEPTION: You will use this documentation method for any income-contingent payment.
An inexperienced loan officer or call center lender might not take this extra step or may not teach their loan officers to ask for it.
Here’s how you fight back:
If the payment reported on the credit report is less than the threshold payment calculation above, you must provide the underwriter with a statement from the student loan servicer that reflects the actual loan terms and payment information for each student loan(s).
I specifically posed this question to a VA certified underwriter regarding an IBR repayment with $0 due monthly.
I was assured that with documentation showing that the loan is in a repayment status, and you can corroborate the payment reported on the credit report with a document from your student loan servicer, and you’re in the clear.
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.
By far, the single biggest mistake that inexperienced loan officers make is using FHA’s 1% rule for all student loans, all the time.
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.
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.
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.