For the most part, student loan debt should be treated like any other debt when you apply for a mortgage.  However, for federal student loan borrowers on income-driven repayment plans like IBR, PAYE, and REPAYE, there are special considerations that must be taken.

Understand the Issue

Federal student loan repayment works differently than most other debts, because your payments can be based upon how much you make instead of how much you owe.  To deal with the possible changes in monthly repayment obligations, most mortgage lenders will use 1% of your total loan balance as a minimum monthly payment, so if you owe $50,000 on your student loans, your lender will assume you owe at least $500 per month.  Even if you owe less because you are on IBR, the lender will still treat your application as though you owe the full $500 every month.  This change can limit your home buying power and possibly cause your application to get rejected.  We have previously explored the hows and whys of the current situation here.

Plan Ahead

This is the most important tip for addressing this issue.  If your loans are currently in deferment or you owe $0 per month due to IBR or PAYE, expect your lender to use the 1% as the basis for the mortgage calculation.

If you are going to get enrolled in an income-driven plan, get it address long before you plan on applying for a mortgage.  Funny things can happen during the application process, and delays or unrequested deferments can derail a mortgage application.

If you have private loans, you should look to find a way to get your monthly minimum payments lowered.  This can be done by either extending the time you have to repay the loan, or getting a lower interest rate.  Ideally, you can do both.  In many cases the most effective way to do this is to refinance with another company.  Again, this process can take months, so get it taken care of long before you start the mortgage process.

The key here is the monthly payment as reported on your credit report.  Get all your ducks in a row ahead of time and confirm that the credit report information is accurate.  Trying to get this fixed while applying for a mortgage is an uphill battle.

Work with an Expert

Working with a mortgage broker might be in your best interest.

Before you start the process, understand that their interests and yours are not perfectly aligned.  Their commission may vary based upon the lender they use, and it may not be the best lender for you.

However, the mortgage brokers should have a number of contacts at various lenders and be very familiar with the process.  This is essential.  Finding a lender who will work with your student loan situation is tricky.  If you have a mortgage broker who understands the issues and is able to find companies that will not use the 1% number, their commission will be money well spent.

Bottom Line

Going through the mortgage process can be difficult in the best circumstances.  Adding student loans to the equation only makes things that much more difficult.  However, if you understand the situation, plan ahead, and work with an expert, you can see to it that you have a positive outcome.