Deferred student loans can be a great thing. They help you to get back on your feet before you have to start making principal and interest payments on your college debt. Federal student loans are automatically deferred for six months following graduation. Beyond that time, you may get your loans deferred if you meet special guidelines, otherwise, your loan payments begin.
Oftentimes, student loans create a roadblock to securing a mortgage. Students that went through excessive schooling can find themselves with $100,000 or more in student debt, resulting in very high monthly payments. This often makes it impossible to secure a loan.
The VA loan, however, is one of the few programs that allows a few exceptions when it comes to student loans, especially deferred student loans.
What are the VA Guidelines?
The VA looks at your deferred loans based on the amount of time they will be deferred. If you do not owe payments for 12 months or longer, the VA allows the lender to exclude it from the debt ratio calculation.
If you owe payments within 12 months, though, the lender must include the payment. If there is not a payment reporting on the credit report, you’ll need to provide supporting documentation showing the amount you will owe. If you have a payment plan worked out with the loan servicer, make sure you have proof of the lower payment so the VA lender doesn’t use the standard loan payment to calculate your DTI.
The Exception to the Rule
There is one exception the VA has regarding deferred student loans. They want to know the reason you deferred the loans. Did you do it because of financial hardship? This is the one reason lenders will not be able to exclude your student loan payments from your debt ratio. If you deferred your loans because you could not afford them, chances are you will not qualify for a VA loan either.
One other circumstance that would prevent you from securing a VA loan is if you deferred your student loans because you are unable to find employment or you are underemployed. Because a large part of qualifying for the VA loan depends on your income and employment, this would prevent you from securing a VA approval.
On the other hand, if you deferred the loans because of any of the following reasons, you may qualify:
- You are still enrolled in classes (at least half-time)
- You are still serving in the military
Again, you will have to prove that your loans are deferred for at least another 12 months in order for the lender to exclude them from your debt ratio.
Should You Exclude Deferred Student Loans?
The real question here is should you exclude the deferred student loans from your own calculations? Besides the fact that the lender can ignore them for qualifying purposes, you must determine if you can afford the mortgage and the student loans. Your loans won’t stay deferred forever. Eventually, you will have to start making payments.
Think about how you will afford those payments. Will you take the standard loan payment or will you apply for a program, such as the Income-Based Repayment Plan that will tailor your payment to your income? If it’s the standard payment, prepare yourself for a hefty monthly payment. Can you fit that into your budget comfortably? Is your income going to increase significantly before the repayment period begins?
These are things you must consider before you decide if you should take a VA loan with deferred student loans. Give it careful thought as both student loans and a VA loan are big financial responsibilities. When you take the mortgage that you can afford, you can comfortably enjoy homeownership rather than fretting about where your next mortgage payment will come from.