Student loans are the debt that surprises buyers most, because a payment of $0 on your statement almost never means $0 to a mortgage lender. Each loan program has its own formula for what a student loan "costs" each month, and that formula can move your maximum price by tens of thousands of dollars.
Why a $0 payment still counts
Your debt-to-income ratio, or DTI, is the new house payment plus your monthly debts, divided by gross monthly income. The debt-to-income ratio guide covers the full formula. Lenders are approving a 30-year loan, and a student loan that costs nothing today will cost something later. Deferment ends, forbearance ends, and income-driven payments get recalculated every year. So each agency puts a placeholder payment in the math when the real one is zero or missing.
Income-driven repayment means a plan where the payment is set by your income and family size instead of the balance. Deferment and forbearance are pauses where no payment is due for a set time.
The rules, program by program
FHA
HUD's rule applies to every student loan regardless of payment status, whether it's in repayment, deferred or in forbearance.
- If the credit report shows a payment above $0, or you document an actual payment above $0, the lender uses that payment.
- If the payment shows as $0, the lender uses 0.5% of the outstanding balance.
So $48,000 in deferred loans counts as $240 a month on FHA. If you're on an income-driven plan with an $85 payment, FHA uses $85, not $240. When the lender uses a payment lower than the one on your credit report, it needs written proof of the actual payment and the loan terms from your servicer.
Conventional (Fannie Mae)
Fannie Mae starts with the payment on the credit report, or the payment on your most recent student loan statement if the credit report has it wrong. When the report shows $0 or nothing:
- On an income-driven plan, the lender can qualify you with a $0 payment if your documents verify the payment really is $0.
- For loans that are deferred or in forbearance, the lender uses 1% of the balance, or a fully amortizing payment based on your documented repayment terms.
The documented $0 rule is the most generous student loan treatment of the four programs. The 1% rule for deferred loans is the toughest, at double FHA's figure. QualRate's calculators use the 1% figure for Conventional when you enter a $0 payment, because that's the safe planning number. If you have a documented $0 income-driven payment, your real Conventional number can be higher than the calculator shows.
Fannie Mae also lets the lender leave a student loan out completely when someone else, such as a parent, has been paying it. The lender needs 12 months of canceled checks or bank statements from that person showing on-time payments.
VA
VA's rule, from its Lenders Handbook (M26-7):
- If you give the lender written proof that the loan will stay deferred at least 12 months past the closing date, it isn't counted at all.
- Otherwise the lender figures a threshold payment: 5% of the balance divided by 12. On $48,000 that's $200 a month.
- If the credit report shows a payment higher than the threshold, the lender uses the higher payment.
- If the credit report shows a payment lower than the threshold, the lender can use the lower payment with a statement from your servicer, dated within 60 days of closing, showing the actual terms.
On a $0 income-driven payment, lenders differ in how they apply that last rule, and the 5% figure is the number to plan around. VA also judges you on residual income, the money left each month after taxes, debts, the house payment and upkeep, so a student loan payment counts twice in VA's eyes. The VA loan requirements guide covers residual income in full.
USDA
USDA's handbook mirrors FHA. The lender uses your actual documented payment when it's above $0. When it's $0, the lender uses 0.5% of the outstanding balance, regardless of whether the loan is in repayment, deferred or in forbearance.
All four programs in one table
| Program | Payment above $0 | $0 income-driven payment | Deferred or in forbearance |
|---|---|---|---|
| FHA | The reported or documented payment | 0.5% of the balance | 0.5% of the balance |
| Conventional (Fannie Mae) | The reported or statement payment | $0 if documented | 1% of the balance, or the documented amortizing payment |
| VA | The higher of the reported payment or 5% of the balance divided by 12, or a lower documented payment | 5% divided by 12 unless the servicer documents lower | Not counted if deferred 12+ months past closing, otherwise 5% divided by 12 |
| USDA | The documented payment | 0.5% of the balance | 0.5% of the balance |
AAA Capital Funding will read your servicer statements with you and show you which program treats your loans best. The number is 888-601-8344.
One buyer with $48,000 in student loans
Taylor earns $4,800 a month gross, has a 680 credit score, and lives with two kids. Other debts are a $320 car payment and $60 in credit card minimums, so $380 a month before student loans. Taylor owes $48,000 in student loans on an income-driven plan with a documented $0 payment.
The examples use a 5.75% 30-year fixed rate, Broward County property tax of 0.95% a year and $283 a month for homeowners insurance. FHA uses FHA 100% financing (a 96.5% first mortgage plus a down payment assistance second that covers the 3.5% down), Conventional uses 3% down, and VA and USDA are $0 down. VA's residual income test sets aside 18% of pay for taxes and $300 a month for upkeep and utilities, the calculator's starting figures.
| Program | Student loan payment counted | Total monthly debts | Highest price |
|---|---|---|---|
| FHA | $240 (0.5%) | $620 | $262,000 |
| Conventional, documented $0 plan | $0 | $380 | $237,000 |
| Conventional, loans in forbearance | $480 (1%) | $860 | $172,000 |
| VA | $200 (5% divided by 12) | $580 | $252,000 |
| USDA | $240 (0.5%) | $620 | $152,000 |
Look at the Conventional rows. The same $48,000 in loans is worth $65,000 in buying power depending on whether Taylor's $0 payment is documented under an income-driven plan or the loans are sitting in forbearance.
FHA still comes out ahead here, because its 56.9% total DTI limit (with automated approval) gives more room than Conventional's 50%. VA reaches $252,000 on residual income, and if Taylor's loans were deferred at least 12 months past closing, VA wouldn't count them and the price would rise to $282,000. USDA stops at $152,000 because of its 41% total debt guideline, though an automated GUS approval can go above that.
Now suppose Taylor's income-driven payment were $85 instead of $0. FHA uses the actual $85, which is $155 a month less than the $240 placeholder, and Taylor's FHA price rises from $262,000 to $282,000. At that point the 46.9% housing ratio becomes the limit instead of total debt.
What helps and what doesn't
Get a documented payment. On FHA and USDA, any documented payment above $0 is used as it is. The federal Repayment Assistance Plan has a $10 minimum payment, so a borrower on it always has a payment above $0 to document. On Conventional, a documented $0 income-driven payment counts as $0.
Get the paperwork before you apply. Lenders work from the credit report, which often shows $0 or the wrong amount. A current statement or letter from your servicer showing your plan and payment fixes that.
Know that forbearance costs you on Conventional. While your loans sit in forbearance during a plan change, Conventional counts 1% of the balance and FHA and USDA count 0.5%, until a new payment is documented.
Show who's paying. If a parent or an employer has paid your loans for the last 12 months, Fannie Mae lets the lender exclude them with proof.
Add a co-signer. When student loans leave you short of the price you want, a co-signer is the first fix AAA Capital Funding looks at, and most of the buyers we get approved have one. A parent or grandparent can co-sign on Social Security or SSI, doesn't go on the title and doesn't have to live in the home. The co-signer calculator shows what one adds.
Paying off a small student loan can help too. Each $100 a month of debt removed is worth about $14,000 of FHA buying power at 5.75% when total DTI is the limit.
Enter your balances and payments in the student loan DTI calculator and it shows the counted payment for each program side by side, or see every program's maximum price at once on the home page calculator. When you'd rather have a broker go over it with you, AAA Capital Funding is at 888-601-8344.