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VA Mortgage and Student Loan Guidelines

For our Veterans and active-duty military personnel, the VA loan program provides a unique opportunity to turn homeownership into reality. However, one significant factor that often comes into play is the impact of student loans on VA loan eligibility. By understanding the dynamics between student loans and VA loans, homeowners can make informed decisions and overcome potential hurdles, ultimately bringing them closer to homeownership.

Can Student Loans Affect My VA Eligibility?

Yes, student loans can play a significant role in your debt-to-income ratio while applying for a VA loan. While it is still possible to qualify for a VA loan with student loan debt, you still must meet the financial requirements.

VA Debt-to-Income Ratio and Student Loans

Student loans typically affect your debt-to-income (DTI) ratio the most when applying for a VA loan. Lenders include your student loan payment when calculating your monthly DTI ratio and look for missed payments or defaults.

Lenders calculate the DTI by dividing your total debt payments (including student loans) by your gross monthly income. Most lenders usually prefer a DTI below 41% for a VA loan. High student loan payments can increase the DTI, making it more challenging to qualify.

How Student Loans Affect Residual Income

VA lenders also look at your residual income and how your student loans affect your debts. Residual income is the income remaining after all debts and living expenses are paid. Therefore, high student loan payments can lower residual income, resulting in fewer funds to put towards paying off a VA loan.

Student Loan Deferment

If you can defer or postpone your student loan payments during the VA loan closing process then the debt might not be considered in the DTI ratio. It is important to note that the student loan deferment process may vary depending on the type of debt you have.

For example, if you have a private student loan, it would be best to talk to a specialized VA lender to work out the details.

Student Loan Forbearance

Student loan forbearance also allows you to temporarily stop student loan payments. Unlike student loan deferment, forbearance allows interest to accrue on your loan balance. It may be smart to look into student loan forbearance if you don’t qualify for deferment.

Allowable Situation for Student Loan Forbearance

There are some situations in which the Department of Education says a mandatory student loan forbearance is possible, including the following:

  • You are serving in a medical or dental internship or residency program and meet specific requirements
  • The total amount you owe each month for all the student loans you received is 20% or more of your total monthly gross income (additional conditions apply)
  • You are serving in a national service position for which you received a national service award
  • You are performing a teaching service that would qualify for teacher loan forgiveness
  • You qualify for partial repayment of your loans under the U.S. Department of Defense Student Loan Repayment Program
  • You are a member of the National Guard and have been activated by a governor, but you are not eligible for a military deferment

If you need help with these issues, discuss your options on student loan forbearance and/or deferment with your loan officer to see how that may affect your VA loan application.

VA Student Loan Forgiveness

Student loan forgiveness is when you are exempt from repaying all or a portion of your student loan balance. There are many reasons this can occur and paying off student loans AND a mortgage may be difficult for some.

Eligible Veterans and active-duty service members may forgive their student loans through the Public Service Loan Forgiveness program. The program helps to relieve student debt, making it possible for many borrowers to keep their jobs.

How to Calculate Student Debt For VA Loans

If your student loans are deferred or in the process of being, provide written evidence to your lender stating the student loan debt will be deferred at least 12 months beyond the date of closing.

If your student loan is in repayment or scheduled to begin within 12 months from the closing date of your VA loan, your lender must consider the anticipated monthly obligation using the following formula:

Student Loan Balance x 5% / 12

This will give you your monthly student loan payments. Your lender will want to make sure you can still pay for your VA mortgage on top of your student debt.

How to Offset Student Loan Debt

Some VA lenders allow you to offset your student loan debt with certain compensating factors. Each lender is different, but here are some of the most common ways to offset your debt:

  • Increase your income with a side job or co-borrower
  • Save for a VA loan down payment
  • Improve your credit score to counterbalance the debt
  • Refinance your student loans if it lowers monthly payments and doesn’t extend life or total amount paid of the loan
  • Change your student loan repayment plan based on your income
  • Pay off other debt

In general, you'll need to plan on counting your student loan payment in your overall debt-to-income ratio calculation.

Reach out to a top VA lender today to see if your student loan debt affects your VA eligibility.