As an Orlando mortgage broker specializing in first-time homebuyers, I actively guide clients through the complexities of homebuying, especially with the resumption of student loan payments post-COVID. At Jhenesis Mortgage, we frequently address questions about how student loans impact mortgage eligibility, particularly as interest rates rise and down payments shrink. For example, understanding how FHA loans and conventional loans (following Fannie Mae and Freddie Mac guidelines) handle student loan statuses empowers buyers to achieve homeownership. Therefore, this blog explores each student loan status, provides real-world examples, answers common questions, and offers a compelling call to action to help you secure your Orlando dream home.
How Lenders Evaluate Student Loan Statuses for Mortgages
The end of the COVID-19 student loan forbearance period has reactivated payments for millions. Consequently, first-time homebuyers in Orlando, grappling with rising interest rates and smaller down payments, must understand how lenders assess student loans. Below, we detail how FHA and conventional loans treat different student loan statuses to clarify their impact on your debt-to-income (DTI) ratio and mortgage approval.
1. Active Repayment
Definition: Borrowers actively make monthly payments on their student loans.
- FHA Loans:
- Guideline: FHA lenders include the actual monthly payment from the credit report or loan statement in the DTI calculation. However, if the payment is $0 (e.g., under an income-driven repayment plan), lenders calculate 0.5% of the outstanding loan balance as the monthly payment.
- Example: Maria, a 28-year-old Orlando teacher, manages $40,000 in student loans with a $200 monthly payment under an income-driven plan. Her FHA lender applies the $200 payment, maintaining her DTI at 42%, below the typical 43% threshold. For instance, with a 620 credit score and a 3.5% down payment, Maria secures an FHA loan for a $250,000 home in Pine Hills.
- Conventional Loans (Fannie Mae/Freddie Mac):
- Guideline: Lenders use the actual monthly payment if it amortizes the loan and appears on the credit report. Otherwise, they apply 0.5% of the loan balance for Fannie Mae or 1% for Freddie Mac.
- Example: John, a 30-year-old Orlando nurse, holds $60,000 in student loans with a $0 payment under an income-driven plan. For a Fannie Mae-backed conventional loan, his lender calculates a $300 monthly payment (0.5% of $60,000), raising his DTI to 45%. To qualify, John boosts his down payment to 5% and demonstrates strong cash reserves, securing a $300,000 home in MetroWest.
2. Deferred or In Forbearance
Definition: Payments pause due to deferment (e.g., borrower is in school) or forbearance (e.g., post-COVID relief).
- FHA Loans:
- Guideline: FHA lenders include all student loans in the DTI calculation, regardless of deferment or forbearance. They use the actual payment if available or 0.5% of the loan balance if no payment exists.
- Example: Sarah, a 26-year-old Orlando graphic designer, carries $50,000 in deferred student loans while pursuing her master’s degree. Her FHA lender applies a $250 monthly payment (0.5% of $50,000), resulting in a 40% DTI. Moreover, with a 3.5% down payment and a 600 credit score, Sarah qualifies for a $200,000 FHA loan for a condo in Baldwin Park, leveraging Orlando’s Down Payment Assistance Program.
- Conventional Loans (Fannie Mae/Freddie Mac):
- Guideline: For deferred or forbearance loans, Fannie Mae applies 0.5% of the loan balance, while Freddie Mac uses 1%. However, if the borrower pays off the loan before closing, lenders exclude it with proper documentation.
- Example: Michael, a 32-year-old Orlando IT specialist, manages $80,000 in student loans in forbearance. For a Freddie Mac conventional loan, his lender calculates an $800 monthly payment (1% of $80,000), pushing his DTI to 48%. To lower his DTI, Michael uses a family gift to pay off $20,000, reducing the payment to $600 and qualifying for a $350,000 home in Dr. Phillips.
3. Income-Driven Repayment (IDR) Plans
Definition: Payments adjust based on income, often resulting in low or $0 payments.
- FHA Loans:
- Guideline: Lenders use the documented IDR payment, even if $0. If no payment appears, they calculate 0.5% of the loan balance.
- Example: Emily, a 29-year-old Orlando social worker, holds $45,000 in student loans with a $100 IDR payment. Her FHA lender applies the $100 payment, keeping her DTI at 38%. For example, with a 3.5% down payment and Florida Housing’s Homebuyer Program, Emily secures a $225,000 home in College Park.
- Conventional Loans (Fannie Mae/Freddie Mac):
- Guideline: Lenders use the actual IDR payment if it amortizes the loan. Otherwise, they apply 0.5% (Fannie Mae) or 1% (Freddie Mac) of the balance.
- Example: David, a 31-year-old Orlando engineer, manages $70,000 in student loans with a $0 IDR payment. For a Fannie Mae loan, his lender calculates a $350 payment (0.5% of $70,000), resulting in a 44% DTI. Consequently, David increases his down payment to 5% and leverages a 720 credit score to qualify for a $320,000 home in Winter Park.
4. Paid Off or Forgiven Loans
Definition: Borrowers fully pay off or receive forgiveness for student loans (e.g., through Public Service Loan Forgiveness).
- FHA Loans:
- Guideline: Lenders exclude paid-off or forgiven loans from DTI calculations if borrowers provide documentation, such as a payoff statement or forgiveness letter.
- Example: Lisa, a 35-year-old Orlando public school teacher, received forgiveness for $30,000 in student loans through PSLF. Her FHA lender excludes the loans, lowering her DTI to 35%. Thus, with a 3.5% down payment, Lisa qualifies for a $275,000 home in Audubon Park.
- Conventional Loans (Fannie Mae/Freddie Mac):
- Guideline: Lenders exclude paid-off or forgiven loans with documentation, such as a paid-in-full statement or forgiveness letter.
- Example: Carlos, a 33-year-old Orlando firefighter, paid off his $25,000 student loan before applying for a Freddie Mac conventional loan. With no student loan payment in his DTI, he qualifies for a $340,000 home in Thornton Park with a 3% down payment, aided by a frontline worker program offering reduced fees.
Strategies for Rising Interest Rates and Smaller Down Payments
Rising interest rates in 2025 challenge Orlando first-time homebuyers, especially those with student loans. Fortunately, both FHA and conventional loans offer low down payment options:
- FHA Loans: Require just 3.5% down with a credit score of 580 or higher, ideal for buyers with limited savings. For instance, Orlando’s Down Payment Assistance Program reduces upfront costs further.
- Conventional Loans: Fannie Mae and Freddie Mac provide 3% down payment options for first-time buyers with strong credit (typically 620 or higher). Moreover, programs like Florida Housing’s Homebuyer Program offer 3% grants for conventional loans.
However, higher interest rates increase monthly mortgage payments, which, combined with student loans, elevate DTI ratios. At Jhenesis Mortgage, we recommend strategies like:
- Paying down student loans to reduce DTI.
- Securing down payment assistance to minimize upfront costs.
- Choosing an FHA loan for flexible DTI and credit requirements.
- Using co-signers or gift funds to strengthen your application.
Examples of Orlando First-Time Homebuyers
Here are two additional scenarios showing how student loans impact mortgage approvals:
- Jamal, 27, Orlando Retail Manager:
- Situation: $35,000 in student loans, $150 monthly IDR payment, 650 credit score, 4% down payment.
- Loan Type: FHA
- Outcome: Jamal’s lender applies the $150 IDR payment, resulting in a 41% DTI. With a $10,000 down payment and Florida Housing’s Homebuyer Program, he buys a $230,000 townhome in Azalea Park.
- Key Takeaway: FHA’s leniency with IDR payments and low down payments enables homeownership.
- Rachel, 34, Orlando Small Business Owner:
- Situation: $90,000 in student loans in forbearance, 700 credit score, 3% down payment.
- Loan Type: Conventional (Fannie Mae)
- Outcome: Rachel’s lender calculates a $450 monthly payment (0.5% of $90,000), raising her DTI to 46%. By increasing her down payment to 5% and showing six months of reserves, she qualifies for a $360,000 home in Lake Nona.
- Key Takeaway: Strong credit and strategic planning offset high student loan balances.
Frequently Asked Questions
Q: How do FHA and conventional loans differ in handling student loans?
A: FHA loans apply the actual payment or 0.5% of the loan balance for deferred/forbearance loans. In contrast, conventional loans use the actual payment if it amortizes the loan, or 0.5% (Fannie Mae) or 1% (Freddie Mac) for deferred/forbearance loans.
Q: Can I qualify for a mortgage if my student loans are in forbearance?
A: Yes, but lenders calculate a payment (0.5% for FHA/Fannie Mae, 1% for Freddie Mac) for DTI unless you pay off the loan before closing.
Q: How do rising interest rates affect my mortgage with student loans?
A: Higher rates increase mortgage payments, which, alongside student loans, raise DTI. For example, FHA loans allow up to 57% DTI with compensating factors, while conventional loans prefer 43%.
Q: Can down payment assistance help with student loans?
A: Absolutely, programs like Orlando’s Down Payment Assistance or Florida Housing’s Homebuyer Program cover down payment and closing costs, freeing funds to manage student loans.
Q: What if my student loans are forgiven?
A: Lenders exclude forgiven loans from DTI for both FHA and conventional loans if you provide documentation, such as a forgiveness letter
Don’t let student loans stop you from owning your dream home in Orlando! At Jhenesis Mortgage, we specialize in helping first-time homebuyers navigate the complexities of FHA and conventional loans, even with rising interest rates and student loan payments. Our team, led by Managing Broker Stacy Ann Stephens, is here to guide you every step of the way—whether it’s leveraging down payment assistance, optimizing your DTI, or finding the right loan program.
Contact us today to start your homebuying journey:
📞 Call: 407-630-9766
📧 Email: [email protected]
🌐 Visit: www.Jhenesismortgage.com
Schedule a free consultation to explore your options and take the first step toward homeownership in Orlando’s vibrant communities. Let’s make your dream home a reality—act now!