How to get approved for a mortgage (in spite of hefty student debt)

These days, purchasing a new home is a common step for millions of people. But what happens when a potential home buyer has a small mountain of student loan debt?


Mortgage lenders will be weary of the outstanding balance and require very specific information that proves you can handle your mortgage payments, now and in the future.


Read on to learn how to navigate getting a mortgage approval, while having significant student loan debt. 


 I. First Steps and Challenges

II. What Your Mortgage Lender Seeks

III. What is Acceptable Documentation?

IV. Navigating Infamously Shady Student Loan Servicer Customer Service

V. How to Prepare for Your Mortgage App

I. First Steps and Challenges


When you go to apply for a mortgage, your lender is going to review the following things (among others):


–      your credit history

–      your income

–      your debt


Your credit score alone does not provide enough information for the lender to determine your credit worthiness. This is partly because credit bureaus don’t know your income, they only know your total debt. And with federal student loans, your total debt doesn’t tell the whole story.


Let’s say a mortgage applicant has a $500,000.00 student loan balance, earns $250,000.00 per year and has an 800 FICO (credit) score. A mortgage lender will require documentation of income and compare it to the student loan balance. If you owe a higher student loan balance than your yearly income, it may indicate to the lender that you can’t afford the payment that a new home will create.


So how can you convince your mortgage lender you can afford your monthly payments, if you’re upside down on your total yearly debt-to-income ratio?



II. What Your Mortgage Lender is Seeking


More important than your total debt are your monthly expenses in comparison to your monthly net income. Essentially, your mortgage lender wants to know if you can afford the monthly payment both now and in the future. They want to be sure that after all your other expenses, you’ll still have enough money left over to pay your house payment.

So, it’s not so much what your student loan balance is, but what your monthly student loan payment is. And with federal student loans, this is not always predictable.


If you are unable to demonstrate acceptable documentation of your student loan payment, such as when you are in a deferment or forbearance, then your lender will likely assume your monthly payment is about 1% of your balance.

If you owe $300,000 in student loan debt, then the mortgage lender will assume your monthly payment is $3,000 per month when they are calculating your monthly expenses to net income ratio. In most cases for borrowers, the 1% formula mortgage lenders use is not ideal, and often not accurately representing what their student loan payment really is.

III. What is Acceptable Documentation?


When the 1% formula is a deal-breaker, you will usually have the option to provide proof of your monthly student loan payment. The type of documentation that a mortgage lender will accept varies, depending on the policies of that individual lender. Some document types are more commonly accepted than others.



a) The Amortization Schedule


An almost universally acceptable document that most lenders will accept to demonstrate your monthly student loan payment is an amortization schedule. An amortization schedule is a document from your student loan lender/servicer that shows the loan math behind what determines your monthly payment.


If a lender knows your balance, interest rate and length of repayment, the monthly payment can be calculated precisely. This is the math your loan holder uses when they generate a monthly payment for you and is often included with your original Promissory Note.


Amortization schedules are a good option for borrowers whose loan terms are longer than 10 years. Your interest rate plays a role, as well, as lower rates create a lower monthly payment given the same term.




All federal student loans default to a standard 10-year term with a fixed payment when you first enter repayment after finishing school. Let’s say you have $100,000 in Stafford loans with a 6% interest rate on a 10-year repayment term. This will create a payment of $1,110 per month. However, a little quick math will tell you that the 1% formula is preferrable since it is only $1,000. So, an amortization schedule is not beneficial for you in this situation.


However, with a consolidated federal student loan of $100,000 at 6%, which is established with a standard loan term, the length of repayment will be 25 years. As a result, an amortization schedule for this loan will demonstrate a payment of $644. In this situation, an amortization schedule will provide the lender with documentation showing that you have a lower payment, and thus, a greater ability to afford your home loan.



b) Income Driven Repayment (IDR) Program Documentation


Student loans are subject to many repayment assistance options (e.g. Forbearance, IDR’s, the COVID Forbearance, etc.) that mortgage lenders have usually never heard of. Federal student loans, unlike most other types of loans, are unique in that they allow you to lower your payment based on your income when you qualify for one (of four) income driven repayment plans. These IDR plans are especially useful for borrowers whose federal student loan debt is greater than their yearly income.

For example, a borrower with $100,000 of student loan debt with a 6% interest rate in a 25-year repayment term will have a payment of $644. However, if they are single with no dependents and their income is $50,000/year, the right income driven plan will lower their payment below $300/month. Upon approval for these income-driven programs, you’ll receive a notice from the loan servicer indicating the monthly payment approved.


In some cases, you can use this document to demonstrate your monthly payment on your student loans to the mortgage lender.


However, most mortgage lenders don’t love this type of proof of payment, since the payment amount can change each year, as all income-driven plans require yearly recertification with recent proof of income. With an amortization schedule, it’s more straightforward and all the numbers can be verified. Amortization is also just the standard way payments have been calculated by lenders of traditional loans. It’s what lenders know.


Fortunately, some mortgage lenders are catching on to how income-driven programs work. As more borrowers provide income-driven documentation, they are understanding that the monthly payment will only increase if the borrower’s income also increases proportionally. Since a borrower’s student loan payment is specifically being sought to determine monthly debt to income, the ratios should remain acceptable regardless of whether the borrower’s income goes up or down. In other words, there is no greater risk, even if the borrower’s income decreases, because their payment will also decrease proportionally.

As I work with borrowers individually, I’m encountering more and more lenders who are accepting a borrower’s income-driven payment when calculating debt-to-income monthly. This is a game changer for borrowers who haven’t been able to get approved for a home loan in the past, specifically due to the amount of their student loan debt.

If you have large student loan debt, when shopping for a mortgage lender, make sure to ask them up front if they accept income-driven payments when determining monthly expenses. This can dramatically influence the amount you are able to finance, your interest rate and sometimes even if you get approved at all.



c)    $0.00 Monthly “Payment” Documentation


A rather unique aspect of student loans is that they can end up in programs that create a $0.00 monthly “payment.” Zero dollar payments are, naturally, a strange concept, especially to a mortgage lender or underwriter. Forbearance and Deferment are obvious examples that create a $0.00 payment, but income-driven plans can, as well, for borrowers whose income is below 150% of the poverty line (up to 225% of the poverty line starting this year under Biden’s new changes).

To satisfy a mortgage lender, your IDR payment needs to be anything above zero, even $20.00/month. If you are presently in a repayment plan that creates a $0.00 payment, you must change it, unless you want your mortgage lender to use the 1% of the total balance formula mentioned above.


If you are in a standard hardship or general forbearance, or any type of deferment, you’ll need to cancel it. If you are enrolling in an income-driven plan, you can request that the forbearance be cancelled during the income-driven application process. The FSA system will see that you are in forbearance and ask you if you wish to cancel it and start payments right away on the income-driven application at Otherwise, you’ll need to call your student loan servicer and cancel the forbearance.


You may also be able to switch your plan during the same call. Keep in mind that any of these changes won’t be visible online or by documentation, until the next billing cycle after the request has been fully processed, at the earliest. Also, you should know that switching to an extended repayment term is quicker and easier than changing your IDR payment. There is no application process to extend your loan term, you simply need to ask the representative at your loan servicer to process it.



>> How to Change Your Income Driven Payment (if it’s presently $0.00)


Let’s imagine a borrower is trying to get a home loan, and due to the borrower’s $18,000 income on their previous tax return, the payment is $0.00 per month in the Pay as You Earn program. We’ll assume the borrower is single and their recertification isn’t for another 6 months to make this example straightforward. We’ll also assume this example is occurring outside of the Pandemic Forbearance that 90% of the country is in right now (more on this, later).


In this scenario, this borrower has a few options. They can try to do a recalculation out of cycle if they have new proof of income that shows a high enough income which will produce a payment above $0.00. Some servicers are reluctant to increase your payment from zero within the same IDR program when it’s not required, however.


Another option for the borrower is to switch to another IDR program. Any proof of income document that is more recent than the proof of income document used during the last IDR recertification that also demonstrates a yearly income above 150% of the poverty line based on the borrower’s family size will work. Often borrowers use their prior year tax return to recertify. A W-2 or paycheck stub can work as a more recent form of proof of income that will allow the qualified IDR payment to be recalculated even when your payment is zero and even if your recertification deadline is several months off.


Once the recalculation or IDR change has been processed, the student loan servicer will then send a letter showing the new payment amount in the IDR program, thus providing the borrower with the documentation needed for the mortgage lender. In the rare circumstance where an IDR recalculation or IDR program change doesn’t work, you can do a full federal Direct Consolidation (If you don’t already have a Direct Consolidation loan and no other federal loans). The new federal Direct Consolidation loan will originate in the desired program.


Please note, if you complete a federal Direct Consolidation loan after 05/01/2023, you may reset your IDR or PSLF qualified payment total to zero. If a federal Direct Consolidation is processed before 05/01/2023, then you will not lose any qualified payments made prior to the consolidation (due to Biden’s Waiver and the One-Time Adjustment).



d) The CARES Act/COVID Forbearance Documentation


A vast majority (90%) of all federal student loan borrowers are presently in the exceptional, and highly unusual, CARES Act Forbearance. This forbearance, born of the pandemic, has generated a larger amount of mortgage loan approval issues than usual.


Not only is it creating a $0.00 “payment” for most federal student loan borrowers (which mortgage lenders will not qualify as an acceptable monthly payment), but the length of the forbearance, 3 years and counting, and its ever-changing end date, has eliminated most of the student loan servicer requests for IDR application renewals and supportive income documentation.

Historically, in federal student loan applications for IDR repayment assistance, most loan servicers only show document history (e.g. IDR program approvals, the yearly cycle dates and amounts due) for about 1 year before it rolls off the account. But since the CARES Act/COVID/Pandemic/Disaster Forbearance paused payments and dropped interest to 0%, borrowers were not required to renew their income-driven enrollments in the traditionally required way.


Additionally, borrowers aren’t receiving regular monthly billing statements while in this COVID-19 Forbearance, which could sometimes work as a suitable document that shows your monthly payment for the mortgage lender. Thankfully, the CARES Act Forbearance can be cancelled so that your loans fall back into repayment and show an amount due. However, this takes time, and the payment that does finally resume/show may higher than ideal. The good news is that you can simply reinstate the CARES Act forbearance after your mortgage loan closes by calling your loan servicer.


e)  A Note on Federal Student Loan Repayment Flexibility


As already mentioned in several instances in this blog, if you’re not in the best student loan repayment structure to make your mortgage lender happy, you can change it.


When you take out a private loan, you are usually stuck with the loan terms that you get from the beginning, unless you can refinance it. With federal student loans, however, you can change the plan you are in to get your home loan, and then change it right back.


Income-driven plans and the Public Service Loan Forgiveness program do not require qualifying payments to be consecutive. This means you can change your plan and even change it right back. This is especially beneficial if you are in forbearance (discussed in greater detail below).


Let’s continue to use the above example where the borrower has $100,000 in debt, on a 10-year term with a 6% interest rate and a $1,110 monthly payment. This borrower has many options. They could consolidate the loan into a federal Direct Consolidation Loan, which will originate in a 25-year term with a $644 payment. But this takes time, about a month.

Alternatively, they can simply call their lender and ask to have their plan changed to the “Extended Standard” or “Extended Fixed” repayment plan. Your new payment will show in the subsequent billing cycle if the change is processed in time. The representative will be able to switch plans for you over the phone in most circumstances (provided they have proper training). You can also ask for an amortization schedule but note that it can take several weeks to receive it.


Another option this borrower has is to enroll in an income-driven plan. This is a good idea if the qualified payment based on income is lower than $644 in this scenario, and if their mortgage lender will accept this type of proof of monthly payment. Once the new payment is achieved, the information can be provided to the lender for your home loan approval. Once you get your home loan finalized, in most cases you can switch right back to whichever plan you were already in. You may miss out on one or two qualifying payments if you switched out of a forgiveness plan, or it may cost you extra interest if you switched out of a 10-year plan, but it will likely be worth it to you if you can get a better mortgage loan.



IV. Infamously Shady Student Loan Servicer Customer Service


Implementing any of the above steps will likely be a challenge due to significant issues at loan servicing companies. Most student loan borrowers you speak with have a horror story of spending hours on hold, receiving terrible customer service and sometimes even being more knowledgeable than the rep on the line about their loans.


When you call your loan servicer to make changes to your payment structure, their customer service rep will probably not understand why you would want to start your payments again, why you would want to increase your payment or why you would give up the CARES Act Forbearance benefits. The mortgage loan application process, and the urgency of it, is likely over most of their heads. They will probably read from a script and waste your time trying to qualify you for the plan they think you should be in, not the one you need for your specific financial situation. It’s enough to make you pull out your hair!

If you ever finally get them to acknowledge your needs and process the request that helps you get your home loan, you have to trust that they will do it correctly, or at all, and then wait forever for the changes to reflect via documentation so that you can provide your lender with what they need.


Most student loan servicers quote you 30 days for the timeframe to receive an amortization schedule, for example. They don’t understand, or care, that you have deadlines from your mortgage lender for this information. They also don’t care that you may have to pay fees for your mortgage loan application extension. But the situation is not hopeless, you simply must be prepared and persistent to make it through this process. The purpose of this blog is to help you do just that.



V. How to Prepare for your Mortgage Application


1.    Shop around for mortgage lenders. Interview them first and find out what they will accept as documentation to demonstrate the monthly payment of your federal student loan. Make sure they understand how the income-driven plans work, when applicable.


2.    Once you have a good mortgage lender, research your repayment options so you know which payment plan will create the lowest possible monthly payment your mortgage lender will honor.


3.    If you need to change the current repayment plan on your student loans, start the process immediately, even before you get pre-approved by the lender, if you can.


4.    Stay on top of the student loan servicer. Do not trust that they will make the changes you need after one request and do not assume they will automatically send you notification upon the processing completion of your request. Call once a week if you need to. Hang up and call back if you get an incompetent or unkind representative. It’s time consuming and annoying, but necessary when you are trying to buy a home. Time is of the essence.


5.    Seek out help beyond your student loan servicer, when needed. Do not feel bad if you can’t get everything accomplished by yourself. A majority of the borrowers I speak to come to me after they have already tried, and failed, to resolve their issues with the loan servicer or even the Ombudsman. Mortgage lenders, financial planning and accounting professionals often hire me because even they don’t understand how student loans work.


Buying a home can be challenging, and doing it while holding large amounts of student loan debt can be even more so.

However, if the above steps are followed, many student loan borrowers can get approved for home loans when they previously assumed it was impossible due to the size of their student loan debt.


Alright, you’ve made it to the end of this blog. I hope you found the contents helpful and beneficial.


If you are looking for support balancing your student debt repayment with your mortgage application process, consider speaking with a 25 year expert to thrive through the experience. 

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