How Student Loans Can Affect Your Debt-to-Income Ratio

Whether you're fresh out of school or have been out for a while, there is an important question you need to address when applying for a VA home loan: How much student loan debt do you have? If you have some, you're not alone. But like many other Americans, you’ll need to understand how student loan debt will affect your debt-to-income ratio when buying a home.

Let's say you make $5,000 a month and have the following debts:

• Estimated house payment with taxes and insurance is $1400
• Student loans are $250
• Credit card is $50
• Car payment is $300

Your DTI ratio would be the sum of those debts ($2,000) divided by $5,000 — 40 percent.

If your student loan payment was $300 more expensive, your DTI ratio would climb to 46 percent, which is not ideal. That doesn't mean you absolutely can't qualify for a VA loan, but a loan officer will have to look at some compensating factors on a case-by-case basis to approve you.

Some of the more common compensating factors include a high credit score, good credit history or additional income in your household.

If you're worried student debt might hamper your chances of getting a VA loan, the Lighthouse Program is a free service that helps Veteran homebuyers strengthen their financial profiles and get back on track with the VA loan process.

Student Loan Default, Deferment and Forbearance

If you have student loans but aren't currently paying them, your loans will fall into one of three categories: default, deferment or forbearance. If you are in default — meaning your loan payments are due each month but you aren't paying the bill — then you will not likely qualify for a VA home loan.

If your loans are in deferment or forbearance, the lender isn't requiring you to make monthly payments at this time.

Is one better than the other? Simply put, yes. It's better for your mortgage application if your student loan is deferred.

Deferment occurs under circumstances approved by the lender, most commonly enrollment in school. With deferment, your student loan principal and interest payments are put on hold. Your lender will likely not include your student loan payments in your DTI ratio if you can show that they'll be deferred for at least 12 months after your closing date.

Forbearance Can be a Problem for VA Loans

Forbearance occurs when you can't make your monthly student loan payment. The lender will agree to reduce your loan payment or cancel it completely for a specific period of time. Interest still accrues on your loan during forbearance. Because forbearance is based on financial hardship, it's looked at with more scrutiny by a mortgage lender.

If you can't pay your student loan, a mortgage lender will be concerned that you won’t be able to make timely mortgage payments either. To deal with this increased risk, a VA mortgage lender is going to require that the full monthly payments on a student loan in forbearance be included in your DTI ratio.

Student Loan Forgiveness

As the student debt crisis continues to be dealt with and new solutions emerge from the government, more opportunities to lighten your student loan debt are becoming available. There are a number of ways for your debt to be forgiven, for a full breakdown of the Department of Education's Forgiveness, Cancellation, and Discharge Program, read their guide here. Military members and servicemen are eligible for forgiveness through military service or the Segal AmeriCorps Education Award.

If you're considering a home purchase, first ask yourself if you're on strong financial footing and ready to make the commitment. If you decide you're ready, call a home loan expert at 855-870-8845 to discuss how your student loans will play in the homebuying process.