Student Loans and Buying a Home: What the July 1 Deadline Could Mean for You

The Short Version

If you have federal student loans and are considering buying a home in Reno, NV, the repayment plan you select after July 1 could impact how much mortgage you qualify for.

Why?

Lenders factor in your student loan payment when calculating your debt-to-income ratio, or DTI. This ratio plays a crucial role in determining how much home you can afford.

Thus, this is not solely a decision about student loans; it is also a significant homebuying decision.

At NEO Home Loans powered by Better, we believe that the mortgage process should prioritize education rather than pressure. Here is what you need to know before making a decision.

What’s Changing on July 1?

Beginning July 1, there will be changes to federal student loan repayment options.

The most significant change is the discontinuation of the SAVE plan. Borrowers currently enrolled in SAVE will need to select a new repayment plan. If they do not take action, they may be automatically switched to another plan.

Two repayment options are expected to become more prominent:

The Repayment Assistance Plan (RAP) bases payments on income. For some borrowers, this could result in a lower monthly payment.

The Tiered Standard Plan uses fixed payments determined by your original loan balance. While this may be simpler, it could also lead to a higher monthly payment.

Some borrowers already enrolled in Income-Based Repayment (IBR) may have the option to remain on that plan for a limited time.

Why This Matters If You Want to Buy a Home

When applying for a mortgage, lenders assess your monthly income against your existing financial obligations. This includes expenses such as credit cards, car payments, personal loans, student loans, and your future mortgage payment. This assessment forms your debt-to-income ratio.

If your student loan payment increases, your DTI also rises. An elevated DTI may reduce your purchasing power.

Conversely, if your student loan payment decreases and is properly documented, your buying power may improve. This is why choosing the right repayment plan is essential.

The Part Many Borrowers Miss

Even if your student loan payment is currently $0, a mortgage lender may not consider it as such.

In some instances, lenders apply an estimated payment instead. A common calculation is 0.5% of your total student loan balance. For example, if you owe $60,000 in student loans, a lender might factor in $300 per month when assessing your mortgage eligibility.

This can significantly impact your financial situation.

Therefore, before assuming that your student loans will not affect your mortgage application, ensure you understand how your lender will account for them.

RAP, IBR, or Standard: Which Plan is Best for Buying a Home?

There is no universal answer to this question.

The best plan depends on your income, loan balance, family size, timeline, and the type of mortgage you are pursuing.

Generally speaking, RAP may be beneficial if it offers a lower documented monthly payment than what the lender would otherwise use.

IBR can be advantageous if you are already enrolled and your payment is low or $0, particularly if you are applying for a conventional loan.

Standard repayment may be suitable if you prefer a fixed, easy-to-document payment and have sufficient income to support it.

The key term here is documented. A low payment only aids your mortgage application if your lender can verify and utilize it.

FHA and Conventional Loans May Treat Student Loans Differently

This distinction is crucial.

Conventional loans may offer more flexibility when applying an income-driven repayment amount, especially if it is documented correctly.

FHA loans may have stricter guidelines. Often, FHA lenders will use either your documented payment or 0.5% of your student loan balance, whichever is higher.

This means that two borrowers with the same income and student loan balance might qualify differently based on the loan program.

This is why it is beneficial to discuss your options before selecting a repayment plan or applying for a mortgage.

What Should You Do Before July 1?

Begin with these four steps.

First, check your current repayment plan. Log into your student loan account to verify your current plan, balance, and monthly payment requirements. If you are on SAVE, be attentive to any notifications from your servicer.

Next, run the 0.5% test by multiplying your total student loan balance by 0.5%. This will give you a rough idea of what a lender might count if your payment is deferred, missing, or not adequately documented.

Then, compare your payment options. Evaluate RAP, IBR if available, and the Standard Plan. Do not simply opt for the lowest payment online; consider how that payment might influence your mortgage qualification.

Finally, consult a mortgage advisor before making any significant decisions. Changes to repayment plans, refinancing student loans, or applying for a mortgage all interact with one another.

Before you make any commitments, ask your mortgage advisor to model the numbers with you.

A Quick Example

Let’s consider a scenario where you owe $60,000 in federal student loans.

A lender applying the 0.5% calculation might count $300 per month in student loan debt against you.

If your new repayment plan results in a documented payment of $150 per month, that lower payment could positively impact your DTI.

However, if your documented payment is $500 per month, your purchasing power may be less than anticipated.

This highlights that the right plan is not always the one that sounds appealing. It is the one that aligns best with your overall financial situation.

Frequently Asked Questions

Can I buy a home if I have student loans? Yes, having student loans does not automatically prevent you from purchasing a home. Lenders simply need to understand how your payment fits into your complete financial picture.

Will a $0 student loan payment help me qualify? It depends. Some loan programs may accept a documented $0 payment, while others might still factor in a percentage of your balance. You need to confirm how your lender will handle this.

Should I switch repayment plans before applying for a mortgage? Not without consulting a mortgage advisor first. A change in plan can influence your documentation, credit report, and qualifying payment.

Is RAP better for mortgage approval? It varies. RAP may be beneficial if it lowers your documented monthly payment. However, for borrowers with higher incomes, RAP could result in a higher payment than expected.

Should I refinance my student loans before buying a home? Proceed with caution. While refinancing may reduce your payment and improve your DTI, converting federal loans to private ones can eliminate federal protections. Evaluate the full implications before making a decision.

The Bottom Line

Your student loan repayment plan can significantly impact your mortgage approval, DTI, and overall buying power.

However, with careful planning, it does not have to hinder your homeownership aspirations.

Before July 1, take a moment to review your student loan options and consult with a mortgage advisor who can help clarify the numbers.

At NEO Home Loans powered by Better, our aim is not just to assist you in obtaining a loan. We strive to empower you to make informed financial decisions that contribute to your long-term wealth.

Ready to assess your situation? Start your online pre-approval with NEO Home Loans powered by Better and gain a clearer understanding of your homebuying potential in just minutes, with no effect on your credit score.

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