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Strategies to Fix Student Loan Debt on Mortgage Applications & Buy a Home

Student debt can make it difficult to buy a house, but careful mortgage planning can make a home loan possible for student loan borrowers.

Written By: Michael P. Lux, Esq.

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Many borrowers assume that student loans make it hard to buy a house because they can hurt your credit score.

This assumption is correct because missed payments or delinquencies can certainly hurt your mortgage application.

However, the connection between student loans and credit scores is only a tiny part of the mortgage analysis. For most borrowers, the big impact of student debt is felt in the form of Debt-to-Income ratio analysis — the more you have to spend each month on student loans, the harder it will be to qualify for the mortgage you want.

This guide will cover how student loans can impact your DTI and explore the tools and strategies that borrowers can use to reduce or eliminate the impact of student loans on mortgage applications.

Student Loans and the Debt-to-Income Ratio (DTI)

The debt-to-income ratio (DTI) is one of the most critical numbers in the mortgage application process. DTI compares your monthly bills to your monthly income. It is how lenders evaluate a mortgage applicant’s ability to pay their bills.

There are two DTI numbers that lenders will consider. The first is called the front-end ratio. The front-end ratio compares the applicant’s expected mortgage to their monthly income.

The math on a front-end ratio calculation is relatively simple. Lenders will take the applicant’s expected housing costs – principal, interest, taxes, insurance, etc. – and divide it by the applicant’s monthly income before taxes. The FHA Mortgage Calculator is an excellent tool for estimating housing costs.

Here’s an example of the front-end ratio at work. Suppose the total expected housing costs are $1,000 per month and the applicant earns $5,000 per month. The front-end ratio would be .20 or 20% ($1,000/$5,000). Most mortgage companies want a front-end ratio of less than 28%, but some will go up to 31% or even higher in certain circumstances. Student loans don’t impact the front-end ratio.

The DTI number that causes headaches for student loan borrowers is called the back-end ratio. Instead of looking at the expected housing costs, the back-end ratio looks at all monthly expenses compared to monthly income. Lenders will look for the back-end ratio to be less than .41 or 41%. However, the maximum back-end ratio will move up or down depending upon the applicant’s credit profile. Some lenders may even approve over 50%.

The back-end ratio includes the following monthly bills:

  • current housing expenses
  • car payments
  • student loan bills
  • minimum monthly payments on credit cards
  • any other debt that appears on a credit report

The back-end ratio DOES NOT include the following monthly bills:

  • utility bills
  • food and groceries
  • cell phone bill
  • cable bills
  • retirement plan contributions to 401(k), IRA, and Roth accounts
  • most subscriptions

One final note on back-end DTI calculations. Lenders usually take yearly income and divide it by 12. If you get paid every two weeks, take your paycheck, multiply it by 26 and then divide by 12 for your monthly income.

Strategies to Improve Debt-to-Income Ratios

Fixing the back-end DTI isn’t an easy task. Most borrowers can’t just snap their fingers and have less debt. However, there are ways to tweak the DTI to lower your ratio.

Pay Down Credit Card Balances – With most debts, paying down a balance doesn’t improve your DTI. For example, if you pay extra towards your car payment, your monthly payment remains the same. Accordingly, your DTI stays the same. However, paying down your credit card balance lowers your minimum monthly payment. Therefore, the smaller the balance, the less you’re required to pay monthly. The less you’re required to pay monthly, the better your back-end DTI becomes.

 Change Repayment Plans – One of the perks of federal student loans is the variety of available repayment plans. Suppose a borrower has $35,000 in federal student loans, and they are on the standard repayment plan. According to the federal loan repayment simulator, the monthly payment used in the DTI calculation would be $389. If that borrower switches to the graduated repayment plan, the payment to $222 per month. By changing to an income-driven plan like REPAYE or PAYE, borrowers can potentially lower their monthly payments even further, depending on their income. Even though the student loan balance hasn’t changed, by switching repayment plans, the borrower can improve their back-end DTI.

Eliminate Smaller Balances – We’ve established that lowering the balance on most loans won’t reduce your monthly expenses. But, paying off an entire balance can make a huge difference. Typically, we suggest that borrowers pay down their highest-interest debts first. However, one notable exception is when borrowers are trying to improve their DTI for a mortgage application. By paying off a smaller loan in full, even if it is a low-interest loan, the monthly payment disappears from the credit report. Thus, one less debt means a smaller back-end DTI.

Refinancing Student Loans for Mortgage Applications

Another option to improve DTI is to refinance your student loans. Student loan refinancing is when a borrower finds a lender willing to pay off some or all of the borrower’s old student loans. The borrower then repays the new lender according to the terms of the new loan contract.

Typically, borrowers refinance their student loans to secure a lower interest rate on their student loans. However, if someone is refinancing to qualify for a mortgage, the objective is reducing the monthly payment. For example, getting a lower interest rate helps with this goal, but extending the repayment term can make a much more significant difference.

Please note that refinancing student loans is different than temporarily picking a new repayment plan. Before refinancing, borrowers should consider several factors:

Be Extra Careful with Federal Loans – Federal student loans have excellent borrower perks, like income-driven repayment plans and student loan forgiveness. By going through a private student loan refinance, any federal loan permanently loses those perks. Borrowers should only refinance federal loans if they’re sure they’ll be paying back the entire loan without the need for any of the federal programs.

Shop Around – Work with multiple lenders. Each lender evaluates applications differently according to their formulas. Checking rates with different companies will ensure you get the best deal. There are several lenders offering student loan refinancing. We suggest applying with at least five.

Don’t Delay – The entire refinance process can easily take longer than a month. Getting approved takes time. Having your new lender pay off the old debts takes time. Waiting for your credit report to show the old loans as paid off takes time. If you are going to refinance to help a mortgage application, be sure to do it long before applying for the mortgage.

Find the Best Long-Term Rate – If you are refinancing to get lower payments for a mortgage application, you want a more extended repayment plan. For example, a 20-year loan will have much lower monthly payments than a 10-year loan. The interest rate will probably be slightly higher, but the monthly payments will be much lower. Keep in mind that the companies advertising the lowest rates are usually promoting their short-term loans. Focus on the lenders who have the best 20-year refinance rates.

Multiple Refinances – As you plan your strategy, remember that there is nothing wrong with refinancing your student loans multiple times. Borrowers may opt for a long-term loan when they are getting ready to get a mortgage and refinance a second time after purchasing the house to lock in a lower interest rate. This strategy can be a very creative way to work the system. However, it comes with risk, as borrowers must bet on future approvals and lower interest rates.

Mortgage Applications, Student Loans, and Credit Scores

Thus far, we have focused primarily on the DTI because this is typically how student loans most impact a mortgage application. However, student loans can also affect credit scores. For example, longer credit histories typically help credit scores, and a student loan might be a borrower’s oldest line of credit. Additionally, making payments on time can improve a credit score. Unfortunately, late payments and other student loan issues can damage credit scores.

Refinancing has the ability to help or hurt a credit score. In the vast majority of cases, the impact on credit score is minimal in either direction. It usually is difficult to predict the exact nature of the score change. Paying off several loans and combining them into one new loan often cause credit scores to rise. However, because the oldest line of credit for some borrowers is their student loans, credit age can negatively affect the score.

Refinancing applications can also cause a slight dip in the credit score. Fortunately, credit agencies generally count shopping around with multiple applications the same as a single application. For this reason, it is crucial to make any student loan moves well in advance of the mortgage application. This will ensure that any potential negative impacts are minimal while allowing borrowers to take advantage of the positive consequences.

For borrowers with excellent credit scores, the minor variations from the refinance process are unlikely to impact the amount offered or the interest rate on their mortgage.

Finally, if your lender has mistakenly reported any negative information to the credit agencies, be sure to get this adverse reporting fixed as soon as possible.

Working with Mortgage Brokers and Lenders

Because credit scores can be complicated, it is often a good idea to consult an expert. Mortgage brokers earn their living by helping people find mortgages. Some are better than others, and some are more reputable than others. Finding someone skilled and experienced can make a big difference in getting approved.

Mortgage experts will be able to help most student loan borrowers figure out where they stand. They can help mortgage applicants answer the following questions:

  • What size mortgage will I qualify for?
  • Is my credit score going to be an issue?
  • What ways can I improve my DTI?
  • What price range should I be considering?

Where the mortgage brokers and lenders can fall short is in helping borrowers make a responsible decision. Determining how big a mortgage someone can qualify for is one thing, but determining whether it is a good idea is another matter. Just because you can qualify for the mortgage doesn’t mean you can afford it or that it’s a good idea. Brokers get paid when new loans are created, so they don’t have an incentive to tell you when a mortgage is a bad idea.

Another area where mortgage experts can often lack expertise is with student loans. Many mortgage lenders don’t fully understand how federal income-driven repayment plans work. This knowledge deficiency can make the underwriting process more difficult.

Underwriting Issues – Can I Use IBR, PAYE, or REPAYE Payments?

Mortgage underwriting is the process by which lenders evaluate an applicant’s finances to determine whether or not they should offer a mortgage loan. This process also determines the interest rate and loan size.

Historically, federal student loans’ income-driven repayment plans have been a hurdle for borrowers looking to get a mortgage. The good news is that most lenders are becoming more knowledgeable on this issue.

In the past, lenders would not accept income-driven payments for DTI calcluations because the payments could go up. Therefore, they concluded that the payments weren’t an accurate representation of that monthly expense.

Student loan borrowers and advocates argued that the only reason these payments would go up is if the borrower was making more money. Therefore, borrowers making more money would be in a better position to repay their mortgage.

Nonetheless, for years, borrowers weren’t able to use income-driven payments for DTI calculations. Instead, lenders would replace the actual monthly payment with 1% of the loan balance. For borrowers with enormous debts, this would often shatter the DTI and lead to application rejections.

Mortgage giants like Freddie Mac and Fannie Mae have finally seen the light. They are now more accepting of income-driven repayment plan payments for DTI calculations. Most smaller lenders, like local credit unions and regional banks, also follow the same improved rules. However, not all lenders will accept IBR, PAYE, or REPAYE payments into their DTI calculations. For this reason, it is critical to communicate with your lender to determine how they evaluate income-driven payments on student loan applications.

We also suggest applying for a mortgage with a couple of companies. Then, if one of the lenders decides that they are afraid of the student debt at the last minute, you will have another option already in place.

Co-Signer Issues on Mortgage Applications

Being a co-signer on a student loan can also impact your mortgage application. Co-signed student loans appear on credit reports along with monthly payments. As a result, most lenders include the co-signed loan payment in DTI calculations, even if the mortgage applicant isn’t the one who makes the payments.

Many lenders will remove the co-signed loan from the DTI calculation if the mortgage applicant can show that the student loan borrower has been making payments independently for a while, usually 12 or 24 months. However, a computer algorithm initially evaluates many mortgage applications. Thus, co-signed loans can cause an application rejection, even if the primary borrower never misses a payment.

Things get further complicated for co-signers of borrowers still in school. We have heard of lenders going so far as to initiate a three-way call between the mortgage applicant, the mortgage company, and the student loan company. The mortgage company essentially asks the student loan company what the highest possible payment will be once the borrower enters repayment. The mortgage company then uses that number in the DTI calculations. Thus, a loan that a mortgage applicant may never have to pay can still dramatically alter their chances of approval.

Accordingly, if you’re thinking about buying a house in the future, you should probably avoid co-signing on student loans if possible.

Next Steps to Fix Student Loan Debt on Your Mortgage Application and Buy a Home

The following steps could help you qualify for a home loan. Because student loan changes can take months to be reflected in your credit report, you should plan ahead.

Visit the Federal Repayment Simulator – Review the repayment plan options to get the lowest monthly payment.

Refinance Private Loans – The best way to improve debt-to-income ratios for private loan debt is to pick a 20-year loan at the lowest interest rate possible. Borrowers can always refinance again after securing a mortgage.

Try to get a Co-Signer Release – If you have co-signed a student loan for someone else, getting removed from that loan should be a priority.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

12 thoughts on “Strategies to Fix Student Loan Debt on Mortgage Applications & Buy a Home”

  1. This is a great post, full of great information that I didn’t expect to see while browsing your site!! Student loan debt and monthly payment information is always such an unfortunate “surprise” for so many of my clients. I had so many borrowers falsely believe that because their loans were on pause or are in forbearance, they felt we shouldn’t be counting a monthly payment on that debt.

    It is absolutely correct that regardless of a $0.00 payment showing, due to a government or personal forbearance, if there isn’t a payment plan in process, lenders must use a 1% payment (student loan balance) on conventional loans and .5% payment on government loans. I had to explain that is still a debt we have to account for because monthly payments will resume. If they had proof of loan forgiveness prior to closing, we could eliminate it; other than that, I needed proof of what their payments would be as far out as 12 months after closing. Some banks may differ. Some did not know anything about how to get into a repayment plan or how to obtain a letter reflecting their payment dates, which some loan services have as an option to print when logging in now.

    For residents and doctors, we could use the simulator payment, but it was still a process to get the information required for underwriting. I knew it all by heart so it wasn’t hard for me. At the very beginning of the process — at pre-approval stage when I pulled credit, if I saw student loans, I would call them and be sure to get accurate payment info, answer all their questions, and explain all that would be needed to get underwriter approval. I never wanted to send a client out with a pre-approval letter, have them go under contract, and then come back and not be approved. So a lot of emphasis was put on the truthfulness of their application and information they provided.

    And just as you stated, I had a few issues with cosigners, who do not make the payments at all on a debt for the reasons you stated above. There is definitely a lot to consider when applying for a mortgage. This was great!! 🙂 I just resigned my positions as a mortgage loan officer a week ago.

  2. I’m going through the underwriting process now and my DTI is .05% over what it should be. Currently, I have $60,000 in student loans. They are calculating them using the 1% rule. I called Nelnet and got a letter from them showing after the Covid forbearance my payments are going back to the $329 standard payment. Do you think the underwriters will accept this letter so my DTI can be lower?

  3. Oops. I just read your article on the problem with IBR being $0 and also the new Covid rules for student loans. Wondering what will happen with my refi. loan, now, that is already in progress, and I have already paid for the $700. appraisal fee. I wonder what my options will be if this becomes an issue.

    • Hi EJ,

      I saw both of your comments, so I’ll respond to this one.

      My first thought is that your lender shouldn’t have scheduled an appraisal if there was an issue with your student loans or DTI. If they later reject you based upon information that was available before they scheduled the appraisal, I’d ask for my money back as this was their error.

      Generally speaking, if the number is $0, they will use 1% of the loan balance as a placeholder in the DTI calculations, but some are using even lower numbers. Sadly, most underwriters follow a strict procedure and there isn’t really much you can do to change a rejection into an approval.

  4. As a recent graduate, I had very little idea about student loan confliction with mortgage loan. In your article, you have wrote in details which will be beneficial to me before buying house in future. I am so thankful to you for your helpful article.

  5. Michael – will an underwriter use the IBR amount for the mortgage amount approval if at the end of the 20 years (or 25 for grad students) the balance of the IBR will be written off? I’d heard that mortgage lenders wouldn’t consider the IBR unless it’s paid off at the end of the 20 or 25 years. Otherwise they would use the 1% rule. Thank you!


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