Student loan payments often take up a large chunk of a person’s income. This is why the USDA and most other loan programs carefully evaluate student loans. They want to make sure they use the appropriate payment when figuring their debt ratio. They also want to determine if the payments are fixed or adjustable. If, for example, a borrower has an adjustable interest rate on a student loan, there is potential for a higher payment. This could affect the borrower’s ability to pay their USDA loan down the road. Understanding your student loans and how they affect your loan eligibility will help you with the mortgage process.
Currently Due Student Loans
If you currently pay your student loans, then you have the easiest path with USDA loans. The lender for your USDA loan will require you to provide proof of your payments. They cannot rely on the credit report alone. You have to provide loan documents or a letter from the lender holding your student loan showing the amount of your payment. You also need proof of the type of loan you hold. Is it fixed or adjustable? This will play a role in the debt ratio calculation. If you have a fixed rate, the process is simple. If you have an adjustable rate, the lender needs to determine the maximum payment. This is the figure used to calculate your debt ratio.
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Deferred Student Loan Payments
It is common for students to defer their student loan payments. This is common for those who do not have a job right out of school or who enter into the military after college. Although your payments are not currently due, the USDA lender still needs to include them in your debt ratio. Again, your credit report is not a good indication of the payment. If you do not have concrete evidence from your student loan lender of the amount you will owe, the USDA lender will use 1% of the loan amount. This might sound high, but the amount recently decreased from 2%!
Let’s look at an example. If you owe $30,000 in student loans, the lender will use $300 as your payment as long as you can prove it is a fixed rate payment. If you are on a gradual payment plan, the lender will need to see how high your payments can get. The student loan lender will have a document which shows how your payments increase as time goes on or your income increases.
The Total Debt Ratio
Your student loan payments are not the only debt figured into your total debt ratio. It starts with your total mortgage payment. This equals your principal, interest, real estate taxes, monthly mortgage insurance, and homeowner’s insurance fees. To that amount, you also add your other monthly debt obligations. This includes any credit card debt you have outstanding, car loans, or other recurring monthly debts. The lender takes the total minimum payments or amounts reporting on your credit report to come up with your total monthly debts. They compare this amount to your monthly gross income to come up with your debt ratio.
Allowed Debt Ratios for USDA Loan
The USDA is among the most lenient in terms of debt ratios. They also total household income, not just the income of the borrower and co-borrower. This could help you if your debt ratios are higher than the standard 29/41 maximums allowed. Again, the USDA is flexible and may allow exceptions to the rule for debt ratios if there are compensating factors at play.
Eligibility Income for USDA Loans
Something to keep in mind is how the USDA calculates your eligibility income. This is not your qualifying income for the loan itself. This is your total household income to see if you are eligible for the USDA program. If your total household income exceeds the maximum amount allowed for your area, you will not qualify for the program. The amount varies by area as the cost of living varies in each area. In addition to calculating the total monthly household income, however, the USA provides you with certain allowances to help you qualify. These allowances include:
- $480 for children under the age of 18 or over the age of 18 and a full-time student
- $480 for every disabled family member living with you
- $400 for every elderly family member living with you
These allowances help to lower your income, enabling you to qualify for the flexible and affordable program.
If you have student loan payments due now or in the future, it pays to get your documentation in order. If you know your payments are not fixed, you have to secure the proof of the maximum payment allowed. This will help you determine how much house you can afford. If your maximum student loan payment drastically increases your debt ratio, your purchase power decreases. Knowing this ahead of time can help you make the right decision when purchasing a home.
The USDA requires the higher student loan payment in the calculation in order to protect themselves and you. If your higher payment does not start for many years, you might not even consider it right now. When the time comes, however, making ends meet can get rather difficult. Instead of living in fear, the USDA makes sure you do not get in over your head from the start.