How do mortgage lenders count your student loans?

Summary

Mortgage lenders count student loans in your debt-to-income ratio even when you are not making payments. Under Fannie Mae's rules, a deferred loan can be counted at 1% of the balance each month, and FHA uses 0.5% of the balance whenever the credit report shows a $0 payment. On the credit report itself, a federal loan's late payments reach the credit bureaus once you are 90 days behind.

A $40,000 loan in deferment

Take the CFPB's own example borrower: $1,500 a month for a mortgage, $100 for a car loan, $400 for other debts, and $6,000 in gross monthly income. That is $2,000 of debt payments, or a 33% debt-to-income ratio (DTI). Now add a $40,000 student loan that is in deferment.

Fannie Mae, 1% of balance $400 a month DTI 40.0% FHA, 0.5% of balance $200 a month DTI 36.7%

Neither program lets a paused loan count as zero. The difference between the two is more than three points of DTI on the same debt.

The rules behind those numbers

Fannie Mae's Selling Guide works from the credit report first:

If the report shows a monthly payment, the lender may use it. If that figure is wrong, the lender may use the payment on the most recent student loan statement.
If the report shows no payment or $0, and the borrower is on an income-driven plan, the lender may document that the payment really is $0 and qualify the borrower at $0.
For a loan in deferment or forbearance, the lender may use 1% of the balance, even if that is less than a fully amortizing payment, or a payment that pays off the loan on its documented terms.
A student loan paid by someone else can be left out if the lender has 12 months of canceled checks or bank statements from that person showing no late payments.

FHA, under HUD Mortgagee Letter 2021-13, counts every student loan regardless of its status. The lender uses the payment on the credit report or the documented payment when it is above zero, and 0.5% of the balance when the report shows zero. A loan can be left out only with written proof that it has been forgiven, canceled, discharged, or paid in full.

One detail for federal borrowers on the Repayment Assistance Plan: its minimum payment is $10, so a RAP loan will not show a $0 payment.

How high DTI can go

The CFPB says DTI limits differ by lender and loan product. Fannie Mae's are specific. A manually underwritten loan can go to 36% of stable monthly income, or up to 45% for borrowers who meet its credit score and reserve requirements. Loans run through its Desktop Underwriter system can go to 50%.

What the credit report shows

A credit report lists each account's type, balance, payment history, open and close dates, and the creditor's name. For federal student loans, a payment is delinquent the day after it is missed, but the servicer reports the delinquency to the national credit bureaus only after 90 days. At 270 days without payments, a Direct or FFEL loan goes into default, and the default is reported too.

Most negative information can stay on a report for seven years. Accurate late payments cannot be removed by anyone.

Fixing an error

A wrong balance or a late payment you did not make should be disputed with both the credit bureau (Experian, Equifax, or TransUnion) and the company that reported it, which for a student loan is the servicer. The CFPB suggests doing it in writing, explaining what is wrong and why, with copies of supporting documents. The bureau must investigate and pass your dispute to the servicer. The servicer generally has 30 days from receiving a dispute to investigate and respond, and if it corrects the information, it has to notify every bureau it reported to.

Sources

Written by Kaz (pen name). Figures are copied from the sources' published pages on the dates shown. We have not used these products. Corrections: contact form.