Student Loans and USDA Home Loans

Student Loan Payments and their Impact in the Total Debt Ratio

Student loan payments are such a burden to many Americans but they can also be very confusing when it comes to getting a mortgage.  Payments can be deferred until a later date, Income Based Repayment (IBR), fixed payments, graduated payments, adjustable payments, and others.  One thing buyers with student loans usually find out is that even though their minimum payments may be very low or even $0, that is not always the way mortgage guidelines look at it.  USDA, like other mortgage programs, has its own way of looking at student loan payments.

Recent USDA Clarification of Student Loan Payment Guidelines

This week we received a new announcement from USDA which states the following.  “Recent updates to the 3555 Handbook intended to simplify guidance for the delivery of the guaranteed loan program have caused some misperception in regards to total debt ratio calculations, specifically in the subject of student loans.  The Agency is working on revisions to Chapter 11: Ratio Analysis; however, we want to further clarify the subject at this time.

Total debt includes monthly housing expenses plus any other credit obligations incurred by the applicant.  Student loan payments must be included in the calculation of the total debt-to-income ratio and captured under liabilities on the application.”  Student loan payments should be treated as described below:

If You Have Fixed payment loans:  A fixed payment may be used in the debt ratio when the lender retains documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed.  There must be no future adjustments to the terms of the student loan payments.

What if You Have Non-Fixed payment loans:  Payments for deferred loans, Income Based Repayment (IBR), Graduated, Adjustable, and other types of repayment agreements which are not fixed cannot be used in the total debt ratio calculation on USDA loans.  When a borrower has a non-fixed payment, lenders are required to use 1% of the loan balance must be used as the monthly payment and no additional documentation is required.

USDA Rural Development Home Loans offer buyers a great way to purchase a home with no down payment, a 30 year fixed rate payment, and relaxed credit guidelines.  Even though USDA offers so much, many still thing of this program that is only for low income borrowers and small properties in the country.  This couldn’t not be further from the truth.  Households can actually make up to $121,250 or even more in some counties like Wake and Johnston.  So contact our USDA home loan experts to see if USDA is the best option for your home purchase.