One of the primary aspects lenders examine when determining your eligibility for a home loan is your debt-to-income ratio. This ratio essentially measures how much of your gross monthly income (pre-tax income) goes toward debt payments.
To understand how student loans affect buying a house, let’s breakdown both parts of the DTI ratio: front-end and back-end.
Front-End DTI Ratio
The front-end ratio focuses on your housing costs. It’s calculated by dividing your projected monthly mortgage payments by your gross monthly income.
Different lenders have different acceptable front-end DTI ratios. For instance, conventional loans typically look for a ratio of around 28%. But Federal Housing Administration (FHA) Loans allow for a higher front-end ratio, up to 31%.
Back-End DTI Ratio
The back-end ratio, on the other hand, accounts for all of your monthly debt obligations compared to your income. This includes payments towards student loans, credit cards, auto loans, child support, and more, in addition to your housing expenses.
Your lender will add up all these monthly debt payments and divide the total by your gross monthly income to calculate your back-end DTI ratio.
Here’s a quick overview of back-end DTI limits by various loan types:
Conventional mortgage – Fannie Mae: Allows up to 36% for manually underwritten loans. If you meet specific credit and down payment requirements, this can go up to 45%. Certain loans that are underwritten by software permit a DTI of up to 50%.
Conventional mortgage – Freddie Mac: Typically accepts DTIs between 33% to 36% for most loans and up to 45% on a case-by-case basis.
FHA Loans: Allows a DTI ratio of up to 43% for most loans. For the FHA’s Energy Efficient Homes program, this can go up to 45%.
VA Home Loans: Accepts a DTI ratio of up to 41%.
USDA Home Loans: Also accepts a DTI ratio of up to 41%.
Grasping these front-end and back-end ratios can provide insights into how much house you can afford. It can also help you better position yourself for a home loan.