Student Loans and Your First Mortgage in Los Angeles: How Lenders Count Your Debt
Student loan debt is the reason I hear most often from first-time buyers in Los Angeles for why they haven't tried to qualify for a mortgage. Most of the time, the assumption is more pessimistic than the math. Lenders do count student loans in your debt-to-income ratio. But how they count them depends on the loan program, your repayment plan and whether your loans are in deferment. Once you understand the mechanics, the picture usually changes.
Start with real numbers. Use the mortgage calculator to get a baseline monthly payment for the price range you are considering, then add your current student loan payment and your other debts. That tells you which programs are within reach before we talk strategy.
How lenders turn your student loans into a monthly payment
Lenders measure your ability to repay with your debt-to-income ratio (DTI): your monthly debt payments divided by your gross monthly income. For a borrower with student loans, the question is not the size of the balance. It is which monthly payment figure goes into the calculation.
Lenders generally use one of two approaches:
The payment on your credit report, when it is greater than zero. This includes a lower payment on an income-driven repayment plan.
An imputed payment, which is a percentage of your balance (commonly somewhere between 0.5% and 1% per month), when your credit report shows $0 because the loans are in deferment or forbearance, or when the payment isn't documented.
These two methods can produce very different results for the same borrower. That is why the program you choose matters more than most buyers expect.
Conventional loans
For conventional loans, Fannie Mae and Freddie Mac generally let the lender use the actual payment on your credit report when it is above zero. If your report shows $250 a month because you are on an income-driven plan, that $250 is what counts.
If your loans are in deferment or forbearance, the rules typically require either the payment that will apply once repayment begins, if it is documented, or a percentage of the balance. Fannie Mae's rule has generally been 1% of the balance. Freddie Mac's has generally been 0.5%. On a $120,000 balance, that is the difference between about $1,200 and $600 a month in your DTI. Because lenders sell to different investors and add their own rules, the lender you pick can affect how much home you qualify for.
FHA loans
FHA looks at the credit report first, too. If it shows a payment above zero, lenders generally use that payment. If it shows $0 or no payment, FHA's guidelines have required lenders to use a percentage of the balance, historically 1% and, under more recent HUD guidance, generally 0.5%, unless you can document a different payment. Some lenders also allow a documented $0 payment on an income-driven plan, and others add their own minimums. Because this has changed in recent years, ask me what applies to your file today.
FHA also tends to allow higher DTI ratios than conventional loans, and it accepts lower credit scores with 3.5% down. See our FHA loan page for the program basics.
Income-driven repayment: when it helps
An income-driven repayment (IDR) plan sets your federal student loan payment as a share of your discretionary income. For a borrower with a large balance relative to income, the IDR payment can be far below the standard 10-year payment. If that lower payment is what shows on your credit report, it is what counts in your DTI.
Two cautions.
IDR helps most when your balance is high compared with your income. If your income is high, your IDR payment rises with it, and the benefit shrinks.
The plans themselves are changing. The SAVE plan has been tied up in court, and federal changes are moving borrowers toward other plans. Check studentaid.gov for the plans open to you, and talk to me before you switch plans right before an application, because a payment that isn't yet documented can't be used.
If your plan or servicer can give you a letter showing your current or future payment, bring it. Lenders can often use that document even before the credit report catches up, which can take a month or two.
If your loans are in deferment or the grace period
Graduate and professional school borrowers often apply for a mortgage while their payments haven't started. Even though you aren't paying anything yet, most programs require the lender to count something. For conventional loans, a documented future payment can replace the percentage-of-balance rule. Ask your servicer for a written statement of your projected payment before you apply.
Jumbo loans in the LA market
Many LA buyers are shopping above the conforming limit, which puts them in jumbo territory. Jumbo underwriting is set by individual lenders, so student loan treatment varies. Many require the greater of the credit-report payment or a percentage of the balance, and some won't accept a low IDR payment at all, especially when it doesn't cover accruing interest. Strong reserves and a modest loan balance relative to income make jumbo approval easier. See our jumbo loan page.
Self-employed buyers with student loans
Self-employed buyers face two problems at once: tax returns that often understate cash flow, and a student loan payment stacked on top. A borrower with $15,000 a month in bank deposits but $8,000 a month in net taxable income looks very different under a bank statement program than a conventional one. An $800 student loan payment is 10% of income on the conventional file and about 5.3% on the bank statement file. Read more on our self-employed mortgage page.
When non-QM helps
If your DTI is too high for conventional or FHA, non-QM programs sometimes allow higher DTI limits (some go to 50% to 55%) or use alternative income documentation. Rates on non-QM loans are often higher than conventional, commonly by around half a point to a point and a half, which raises the payment. Whether to buy now with a non-QM loan or wait and qualify conventionally depends on your numbers and how long you plan to stay. Home prices can rise or fall, so I don't recommend buying only because you expect appreciation. See our non-QM loan page.
Ways to lower your DTI before you apply
Get your payment documented. If you qualify for an IDR plan and haven't enrolled, that can lower the payment the lender counts. Give it time to show up on your credit report or get a servicer letter.
Pay down other monthly debts. Clearing a $400 credit card minimum helps your DTI as much as cutting your student payment by $400.
Document all of your income. Every extra $1,000 of qualifying monthly income supports roughly $430 to $500 of additional monthly debt at typical DTI limits. Overtime, commission and freelance income usually need a two-year history.
Hold off on new debt. A new car loan right before an application can undo the other work.
A worked example
This example uses a borrower with a high balance relative to income, which is where IDR matters most. The numbers are illustrations only.
| Scenario detail | Standard 10-year repayment | IDR plan |
|---|---|---|
| Student loan balance | $150,000 | $150,000 |
| Student loan payment counted | about $1,630 | about $650 |
| Gross monthly income | $10,500 | $10,500 |
| Other monthly debt (car) | $400 | $400 |
| Target housing payment | $3,400 | $3,400 |
| Total monthly debts | about $5,430 | about $4,650 |
| Back-end DTI | about 51.7% | about 44.3% |
| Under a 45% DTI limit? | No | Yes |
| Highest housing payment at 45% DTI | about $2,700 | about $3,470 |
| Approximate maximum purchase price* | about $345,000 | about $445,000 |
*Assumes 5% down, a 6.75% rate and typical taxes, insurance and mortgage insurance. About $7.80 a month per $1,000 of price.
The standard payment is based on a federal-average rate of around 5.5% over 10 years. The IDR payment is based on roughly 10% of discretionary income. Your actual payment depends on your plan, income, family size and rate. In this example, the only change is the student loan payment the lender counts. It moves the same borrower from over the DTI limit to under it and adds about $100,000 of purchasing power. At LA prices, a budget like this usually points to a condo or a co-borrower, which is why we run your real numbers early.
Conclusion
Student loans are a real factor in mortgage qualification, but they rarely close the door. The program you choose, the repayment plan you are on and the documentation you bring all affect how your debt is counted. Most borrowers I work with have more options than they expect once we go through the details.
If you have student loans and want to know where you stand in Los Angeles, book a free consultation and I will walk through your balances, payments and income. You can also apply online. First-time buyers can also read our guides on first-time homebuyer programs and closing costs.
Anna Kara Inc., branch of Equity Smart Home Loans Inc. NMLS #1241473 | DRE #01924739. Equity Smart NMLS #856170 | DRE #01906808.
Disclaimer: This article is for general information only and is not a loan offer, commitment or financial or tax advice. Examples are hypothetical and do not reflect current rates, fees or your situation. Agency guidelines, lender requirements and student loan repayment plans change and depend on your credit, income, debts and loan approval. Equal Housing Lender.
Frequently asked questions
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Yes, they are counted in your debt-to-income ratio. How they are counted depends on the program and your repayment plan. When your credit report shows a payment above zero, lenders generally use it, including a lower payment on an income-driven plan. When it shows $0 because of deferment or forbearance, most programs require a percentage of the balance instead.
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Often, yes. The balance itself isn’t the deciding factor. The monthly payment the lender counts, along with your income and other debts, is. A borrower with a large balance and a low documented IDR payment can qualify more easily than a borrower with a smaller balance on standard repayment.
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Not necessarily. Paying off loans lowers your DTI, but it also uses cash you may need for a down payment, closing costs and reserves. The right answer depends on your loan interest rates, your savings and how long you plan to stay. A consultation can help you compare the options with your real numbers.
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It depends on your income, student loan payment, down payment and credit. Conventional loans can cost less than FHA when you put 5% or more down. FHA allows lower credit scores and 3.5% down and often higher DTI limits. Non-QM programs can help when DTI is too high for either. The best program is the one your numbers qualify for at the most favorable total cost.
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Your student loans stay separate from your mortgage. Buying, refinancing or selling doesn’t change them. If you sell and keep equity, or take cash out in a refinance, you can choose to use some of it to pay down student loans, but that is a separate financial decision with its own trade-offs.