Are Deferred Students Loans Included In A Borrower's Debt-To-Income Ratio?

Are Deferred Students Loans Included In A Borrower's Debt-To-Income Ratio?  Student Loans are very common today among younger Borrowers.  Most college students today are not able to go to college without incurring Student Loan debt.  With the cost of obtaining a college education continuing to rise, the amount of Student Loan debt is rising as well.  As a result Student Loans are a major factor in qualifying younger Borrowers for a mortgage.  In many cases parents who Co-signed for Student Loans are also also affected by them when they apply for a mortgage or refinance loan as well. 

Payments on Student Loans do not have to be made until 6 months after the student graduates, or stops being a full time student.  While the student is in school, and for the 6 months following, the Student Loans are in what is referred to as "Deferment".  So  a question I often get from young Borrowers who are working and going to school, and parents who have Co-signed Student Loans for the children is Are Deferred Students Loans Included In A Borrower's Debt-To-Income Ratio?  The answer to the question is different for Conventional Mortgages  and FHA Mortgages.

FHA DOES NOT consider Student Loans in deferment in the Debt-To-Income Ratios (DTI), if the Student Loans will still be in deferment for 12 months or more from the Closing date of the property.  If Students Loans will go into repayment, even one day before the full 12 month period from Closing they will be considered into the DTI.  This means if the Student Loan is going go into repayment before 12 months from Closing, a monthly payment needs to be established.  Therefore, the Borrower will have to get a letter from the loan institution (normally Sallie Mae) stating what the monthly loan payments will be once the Student Loans go into re-payment.  FHA guidelines are silent on how to establish the monthly payment if the Borrower is not able to get a letter with the monthly re-payment amounts from the loan institution.  However, Lenders I am familiar with, will use 5% of the outstanding balance as the monthly payment amont.  5% of the outstanding balance is far more than what the actual figure will be, so it is very important for the Borrower to obtain a letter with what the actual payment will be.  Obtaining a letter with the actual payment could be the difference between qualifying for a mortgage or not.

Fannie Mae Guidelines are very different from FHA.  Fannie Mae DOES consider all Student Loans into the Debt-To-Income Ratios (DTI) regardless of whether they are in deferment or not.  If the Student Loans are in deferment, the Borrower will need to provide a letter with the monthly payment amount when the Student Loan goes into repayment.  If the Borrower is not able to obtain a letter from the loan institution with the monthly payment, Fannie Mae requires the Lender to use a MINIMUM of 2% of the outstanding balance of the Student Loans as the monthly payment amount.  While 2% is much less than the 5% Lenders may use for FHA, 2% is still more than what the actual monthly payment will be, and could disqualify a Borrower from obtaining a mortgage.

Sometimes Credit Reports will show a monthly payment for Student Loans in deferment.  When the Credit Reports provides the payment, then the Lender will use the monthly payment amount on the Credit Report, and not require a letter from the loan institution.  However, most of the time the Credit Report does not show a monthly payments for the Student Loans in deferment. 

The above guideline for FHA and Fannie Mae apply not only to Student Loans in deferment, but to all "Projected Obligation" as FHA refers to them, or "Deferred Installment Debt" as they are referred to by Fannie Mae.  Are Deferred Students Loans Included In A Borrower's Debt-To-Income Ratio? The answer is YES for Fannie Mae, and NO for FHA is the debt does not go into repayment for 12 months or more from the Closing date of the mortgage.