USDA loans are a great solution for low to moderate-income families that live in a rural area. The USDA loan allows 100% financing, making it possible to purchase a home with no money down. The USDA has flexible guidelines, except when it comes to the debt ratio. The USDA wants to make sure that you are not a high risk of default. If you have student loan debt, this can complicate matters even further.
Keep reading to learn how the USDA looks at student loan debt.
Student Loan Debt is Okay in Some Cases
You can have student loan debt and still get a USDA loan – it’s not an automatic denial. It’s how the USDA/lender views your student debt that will affect your chances of securing a USDA loan. Because student debt isn’t always the same, you have to be able to prove beyond a reasonable doubt that the USDA is using the correct figure to calculate your debt ratio, including the student debt.
Proving Your Student Loan Debt
Proving your student loan debt in an official manner is the key to your USDA loan approval. This is especially important if you have deferred student loan debt.
When you have deferred student debt, you aren’t making payments on it right now. The typical student loan gets deferred for six months after graduation. But, some student loans can be deferred even longer; it depends on the lender and programs that they provide. If your student debt is deferred for a longer period, the USDA’s general rule is to use 1% of the balance that the credit report shows. If you have $20,000 in student debt, that means a $200 monthly payment. If that sets your total debt ratio over 41%, you could be without USDA loan approval.
In order to prevent the lender/USDA from using 1% of the balance as your payment, you need to provide official proof of the actual payment from the loan servicer. You can ask the loan servicer for a statement or a letter showing what your actual payment will be when your loan comes out of deferred status. If the payment is lower than 1% (which it usually is), the lender can use that figure to determine your debt ratio. Just know that the lender will never be able to exclude your student loan payment altogether.
Using Graduated Payment Plans for Student Loan Debt
If you are on a graduated payment plan for your student loan debt, you are in a different situation. The graduated payment plan means that your payments will increase over time. Sometimes the plans go according to your potential income. If you are in a career that starts you off making little income, but then gradually increases over the years, it makes it easier for you to afford higher student loan payments down the road.
When it comes to USDA loans, the USDA requires lenders to use the maximum student loan payment for qualification purposes. This means the highest the payment will be throughout the loan’s entire term. This may make it slightly more difficult to qualify for the USDA loan since the debt ratio will be higher, especially if your income is lower now than you project it will be when you owe the maximum graduated student loan payment.
The USDA takes all debts very seriously. They want to limit the risk of default since they guarantee the loans for lenders. This means that if you default on the loan, the USDA pays the lender back a portion of the loan that they lost. The USDA obviously wants to prevent this, which is why they care so much about your student loan debt.
Your best bet is to get concrete proof of your payments for your student loans. If the payments are high, you may have to work down some of your other debt in order to ensure that your USDA loan gets approved. In the end, it’s about the big picture and the level of risk that you pose to a lender. Minimizing your risk of default should help you get your USDA loan approval even with student loan debt.