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As more Americans attend four-year colleges and universities, an increasingly large amount are taking on student loan debt to fund their education. Student loan debt can understandably feel like a burden, but it doesn’t have to prevent you from achieving your dreams of homeownership.
A USDA loan can be a great tool to help recent graduates acquire their first home. While you are required to report any student loan debt in your application, having student debt alone will not cause a lender to automatically reject you.
Will my student loans prevent me from getting a mortgage?
Student loans are not a disqualifying factor when applying for a USDA loan. There is technically no standardized amount of student loan debt that will prevent you from being approved for a USDA loan.
Your debt comes into play when lenders check your debt-to-income (DTI) ratio. Your DTI ratio is mostly what it sounds like; a lender can compare how much debt you’re responsible for versus how much income you bring in monthly. However, your DTI ratio is actually a combination of two ratios: PITI and total DTI.
PITI stands for principal, interest, taxes, and insurance, and it represents how much housing debt you pay off each month as a percentage of your gross monthly income. Conversely, total DTI demonstrates the ratio of your major monthly debts to gross monthly income, including your student loan debt.
Along with student loans, other debts factored into your total DTI ratio include personal loans, credit cards and car payments. A USDA lender will not approve an applicant with a total DTI over 41%. Smaller debts like phone bills, utilities and insurance premiums are not included.
USDA Student Loan Calculation
Depending on if you have a fixed-rate or non-fixed-rate student loan, the USDA lender you applied to will calculate how your loan repayments contribute to your total DTI ratio.
USDA Loan with Fixed-Rate Student Loans
The monthly expense of a fixed-rate student loan is easy to factor into your total DTI ratio, as the interest rate does not change over the lifetime of your loan. The USDA lender will add your monthly student loan payment to the rest of your major debts and compare it to your gross monthly income.
USDA Loan with Non-Fixed Rate Student Loans
Non-fixed rate student loans require slightly more consideration than their fixed rate counterparts, as they have a variable interest rate that changes over the lifetime of the loan. According to USDA guidelines, with all non-fixed rate student loan types, USDA loan lenders must use the greater of the following:
- The payment amount reported on the credit report or the actual documented payment, or
- One-half (0.5 percent) of the outstanding loan balance documented on the credit report or creditor verification.
USDA lenders must determine the value of both options before deciding which to use in their overall calculation of your total DTI ratio. For example, you may pay $100 towards your student loans every month. Meanwhile, 0.5 percent of your $30,000 loan balance is $150. Since $150 is the larger value, the lender would use that figure.
USDA Loans with Student Loans
Ultimately, student loans are just a part of your total DTI ratio. While there are other applicant characteristics USDA lenders consider, as long as you keep your ratio below the threshold, you should be on track for approval. If your total DTI is too high, work on paying off more of your student loan before reapplying.
