Today, many first time home buyers feel their student loan debt and lack of down payment prevents the chance of home ownership. But, breaking news effective September 23, 2019 is that USDA student loan guidelines have finally changed! Meaning it is easier for buyers to qualify with student loan debt! Before, USDA debt to income ratio guidelines required 1% of student loan balances to be used in the calculation. For higher student loan balances, it was tough to qualify. Now, buyers with income based repayment, deferred, or other non-fixed student loan payments qualify easier for USDA loans.
Student Loan Payment Plans
When it comes to paying back student loans, there are several student loan payment plan options. Each has advantages for the borrower and mortgage loan programs may treat each differently.
- Income based repayment student loans (IBR for short)
- Student loan payment deferred
- Graduated payment student loans
- Fixed payment student loans
Fixed payment plans are easy to explain as they have a set payment and term. Basically, USDA and other home loans use this payment.
Non Fixed Student Loan Plans
Then, there are payment plans which allow a lower or no payment each month compared to fixed plans. Income based repayment student loans have payments based on the borrower’s income. Actually, these may be as low as $0 per month. When it comes to qualification, most home loans will not use the low IBR payment.
Next, are graduated payment student loans which start at a lower payment and increase over the years. Like IBR student loans, most mortgage guidelines will not use this payment. Finally, there are deferred student loan payments. This is where payments are not due (deferred) for a certain amount of time. This could be for a few months to even years. VA loans are the most lenient on deferred student loans. Unlike other loans, VA will count $0 for student loans deferred over 12 months after closing. Other mortgage guidelines treat these zero payment student debts differently.
USDA Student Loan Guidelines
So, how do USDA student loan guidelines treat these payment plans? Effective 9/23/2019, the requirement is as follows:
How USDA Loans Treat Fixed Payment Loans
If documentation is provided to prove the student loan payment is a permanent, fixed amortization, that payment will be used in the USDA DTI. Keep in mind, the interest rate, repayment term, and payment must be fixed.
How USDA Loans Treat Non-Fixed Student Loan Payments
Any type of non-fixed student loan payment listed above may not be used in the USDA debt to income ratio calculation. Rather, the higher of one half percent of the student loan balance or actual payment reflected on the credit report must be used as the monthly payment. Furthermore, using this calculation requires no further documentation.
“Higher of one half percent of the student loan balance or actual payment reflected on the credit report must be used as the monthly payment. Using this calculation, then no further documentation is required.”USDA temporary modification of Section 11.2 of HB-1-3555 pertaining to student loans
USDA Student Loan Example
Below is an example of payments USDA requires lenders to use when a buyer has student loan debt. Also, it compares the old USDA student loan guidelines to the new ones.
|Student Loan Type||Student Loan Balance||Credit Report||.50% of balance||Which to Use||Old Guideline|
USDA Debt to Income Ratio (USDA DTI)
Student loan payments compared to monthly borrower income is just a part of total USDA DTI. Like all mortgage loans, there is a maximum debt to income ratio. Although, USDA debt to income ratio limits depends if there is an automated or manual underwriting approval. So, there is a housing ratio and a total debt ratio. Below, the ratios are expressed as housing ratio / total ratio. Housing ratio means total housing payment divided by income. Total ratio means all debts including house payment divided by income.
- USDA Manual Underwriting Debt to Income Ratio = 29/41%
- USDA Automated Approval Debt to Income Ratio = Depends on Approval
Max USDA DTI with Automated Approval
As mentioned above, debt ratios on automated approvals depends on the overall file. Thus the stronger the file, then a higher debt ratio is allowed. Chances improve of a higher USDA DTI when compensating factors exist. Examples of compensating factors include asset reserves, higher credit score, and no payment shock. Payment shock compares current rent or mortgage payment to the new housing payment. Lately, we have seen strong files receive an approval with a USDA DTI up to 46%.
Home Loans That Allow Higher DTI
Even after using the USDA student loan guidelines to buy a home, the debt to income ratio could still be too high. Don’t worry yet. Because there are other potential home loan options with higher DTI limits.
- Fannie Mae and Freddie Mac Conventional – Up to 50% DTI
- Fannie will use actual IBR payments!
- Freddie will use .50% of balances
- FHA loans – Up to 55%, maybe more
- VA loans – Up to 50 – 55%, maybe more
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