Calculating Student Loan Payments

Written By: NAMP® Op-Ed Ghost Writer

We have seen frequent changes in the requirements for including student loans over the last year. There was a time where student loans could be excluded from the qualifying ratios if the borrower was able to verify certain terms of deferment. In addition, income-based repayment plans and other temporary reduction plans were permitted. However, the agencies have recently released lender updates that are changing the student loan game.

FHA is just the latest agency to clarify their student loan payment calculation methods with the Mortgagee Letter 2016-08 released on April 13, 2016. This memo goes into effect with all case numbers assigned on and after June 30, 2016. According to this memo, lenders must include all student loans in the borrower’s liabilities regardless of status of payments. 

The lender is required to obtain written documentation of the actual monthly payment when the payment used to qualify is A) less than 1% of the outstanding balance, or B) less than the monthly payment reported on credit. If using the actual monthly payment as verified with student loan servicer documentation, the payment must be fully amortizing over the life of the loan.  FHA has also stated that the lender must use the greater of A) 1% of the outstanding balance on the loan, or B) the monthly payment reported on credit.

USDA released a lender update on March 31, 2016 entitled: ‘Student Loans and their Impact in the Total Debt Ratio’. This memo asserts that fixed payments on student loans may be used in the debt ratio when the lender obtains documentation from the student loan servicer verifying the payment and terms. When using fixed payments, the lender must verify that there are no future adjustments to the terms of the student loan payments.

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Non-fixed payments for deferred loans, income based repayment plans, and other types of adjustable repayment agreements cannot be used in the total debt ratio calculation. Instead, USDA states 1% of the total loan balance reflected on credit must be used as the qualifying payment and no further documentation is required. 

Fannie Mae’s policy is that lenders must use the greater of 1% of the outstanding balance of the student loan or the actual payment or the actual documented payment as verified with the credit report or the student loan servicer. Fannie Mae’s policy is the same regardless of whether the loan is currently deferred, in forbearance, or in any kind of repayment plan. Fannie Mae does allow the lender to override this rule if the payment verified by the student loan servicer is fully amortizing without any future payment adjustments. 

Freddie Mac’s guidelines state that 1% of the outstanding balance is used for the qualifying amount if no monthly payment is reported on credit and there is no documentation in the file to indicate the proposed monthly payment. Freddie Mac will accept a direct verification from the student loan servicer or a copy of the student loan agreement when verifying the monthly payment to override using 1% of the balance. 

Based on the most recent information, lenders can assume that using 1% of the outstanding balance to qualify is always a safe bet. If the borrower cannot qualify with this payment, the burden falls to them to prove that their fully amortizing payment on the loan will be less than this amount. Using adjustable payment plans to qualify is now a thing of the past. 

About The Author

All of NAMP® staff writers are veteran mortgage processing & underwriting instructors for Mortgage Underwriter University ( They have each conducted numerous mortgage processing & underwriting training classes and have worked in the mortgage banking industry for 25+ years. If you're interested in becoming a writer for NAMP®, please email us at:

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