USDA Loan Calculations of Deferred & Income Based Student Loan Payments

Date: May 2, 2013

For potential homebuyers with student loans that are either in a deferred payment status or being paid back through an income based repayment program, the treatment of this liability needs to be considered. When qualifying for a USDA Loan with student loans debts that are not currently being paid upon, due to the loan applicant still being in school or recently graduating from school, the borrower must provide written documentation of the anticipated monthly payment when the repayment period starts.

If the student loan is being paid upon, but at a lesser amount than originally agreed upon, with the payment being determined based repayment ability, then the borrower must document from the student loan provider the contractually agreed upon monthly payment. This payment is then used by the USDA Underwriter when determining the borrower’s debt load for qualifying purposes.

This differs from a FHA Loan in which student loans with a deferment period of more than one year from the settlement date will not be considered in the debt-to-income analysis. This is beneficially for homebuyers who are currently in school and want to qualify for a larger mortgage; without factoring in the monthly payment of future student loan expenses. Furthermore, for borrowers under an income based repayment schedule, FHA simply uses the monthly payment from the credit report to determine the borrower’s debt load.

Bottom line, USDA takes a more conservative approach to the treatment of upcoming student loan payments than FHA. There are cases where a borrower’s debt-to-income ratio, when factoring future student loan payments, will exceed USDA loan debt-to-income guidelines but not FHA loan guidelines.

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