It is not a secret that over $1.6 trillion in student loan debt keeps many Americans from buying a home. Even when the student loan payment is zero, these buyers learn the 1% rule. That’s where many home loans use 1% of the outstanding student loan balance to use in a debt to income ratio. That all important calculation to determine if a buyer qualifies for a home. With $50,000 balances, lenders use $500 per month and $100,000 means $1000. That’s practically another mortgage payment! Now, USDA student loan repayment rules have made it easier for first time and repeat buyers to purchase a home with no down payment.
The Problem Mortgages Have With Income Based Repayment
After graduating from college, most student loans have a grace period before payments are due. It is called deferred payments, usually lasting 6 months after graduation. Often, deferred payments can be delayed even later either because of going back to school or other allowed scenarios. Since no payment is due, buyers think they should be good to go. Right? Actually, no. Lenders know that one day, probably soon, that payments will be required. Since the lender doesn’t know which payment plan will be chosen in the future, a conservative estimate is used in a borrower’s debt to income ratio; it is 1% of the outstanding balances. This is true on pretty much all mortgages.
Income Based Repayment Problems
OK, you are out of deferment and have actually chosen a student loan payment plan. You should be good to qualify now under USDA student loan repayment guidelines now, right? Well, that’s where another potentially mortgage guideline could mess up another zero required student loan payment. Income based repayment student loans are exactly what it says. The required minimum payment is set for a year based on the borrower’s income and is reviewed annually. Thus, the payment plan is not permanent. Again, home loans worry about the effect these future potential payment increases will have over the next 30 year mortgage term. Which means using that 1% calculation again!
Other Student Loan Payment Plans
After deferred and income based repayment, there are graduated payment plans. These start off low and increase at set increments. Usually, the first payment increase happens in just 1 – 2 years. Therefore, loan programs feel the need to account for this increase. Otherwise, not get someone into a house payment knowing that in a year or two there could be troubles making payments. That means the 1% requirement once again. Now the one exception to all of this is a fully amortized fixed student loan payment. These payments are actually used every time as these are just like any other installment loan.
New USDA Student Loan Repayment Guidelines
Until September 23, 2019, USDA used all of the rules above for calculating a USDA debt to income ratio. Although, there are new student loan guidelines to help buyers qualify for a higher house payment or even one at all. So, any type of non-fixed student loan payment will now be able to use the following debt ratio calculation:
Use the higher of one-half percent of the student loan balance or actual payment reported on the credit report. No other documentation is necessary.
USDA Student Loan Repayment Examples
| Student Loan Type | Student Loan Balance | Credit Report | .50% of Balance | Which to Use | Old Guideline |
| Deferred | $50,000 | $0 | $250 | $250 | $500 |
| IBR | $100,000 | $0 | $500 | $500 | $1000 |
| IBR | $75,000 | $500 | $375 | $500 | $750 |
| Graduated | $100,000 | $750 | $500 | $750 | $1000 |
| Deferred | $100,000 | $0 | $500 | $500 | $1000 |
Is a USDA Loan right for you? Learn more about this no money down, affordable housing program.