Fannie Mae or FHA home loan? Which is better for borrowers with student loans?

Guidelines from both Fannie Mae and the Federal Housing Administration (FHA) are giving borrowers wiggle room on their debt-to-income ratio. While this is an improvement over the way student loan debt was calculated in the past, the bad news is that, unlike in some previous guidelines, estimated student loan payments must be included even if the debt is in deferment or forbearance.

"We don't want anyone to be uncomfortable with their mortgage payment," says Jessica Eden, branch manager with AmCap Mortgage in Lincoln, Neb. "But we also recognize that in some cases you can be approved with a higher debt-to-income ratio because someone else, such as a partner living with you, is helping you with expenses."

Student loans and qualifying for a mortgage

Eden says that Fannie Mae and FHA student loan guidelines are similar.

"Both require you to include student loan payments in your debt-to-income ratio regardless of the payment status," she explains. "The calculation of the amount of the payment depends on whether you have documentation from your creditor."

If you don't have documentation, lenders must consider 1% of your loan balance as your monthly payment, such as $500 if you have a $50,000 balance.

Documentation of your actual payment can come from your credit report. But if it's missing or different than what you're paying, you'll need to obtain written documentation from your creditor including:

• your actual monthly payment
• your payment status
• the outstanding balance
• the terms of your loan

In addition, your payment must be fully amortized over the length of the loan, which means that your payments are sufficient so that your balance won't increase over time.

Eden worked with a firefighter whose student loans will be forgiven in ten years due to his public service employment.

"Even though he's currently on a graduated repayment plan and he should qualify for loan forgiveness, we had to use 1% of the loan balance because his payments weren't enough to repay the loan without adding to the balance," says Eden. "We had to qualify him for a mortgage of about $50,000 less than he thought he could borrow."

Which home loan is right for you?

There are pros and cons of each loan option, observes Eden.

"About one-third of our first-time buyers choose conventional loans and the others use FHA or other government-guaranteed loans," says Eden.

There are a few general pros and cons to both Fannie Mae and FHA loans, according to Eden:

• Fannie Mae home loans

Pros: If you have a credit score above 700 and cash for a down payment of at least 5%, a conventional loan could be a better option. You need to pay mortgage insurance unless your down payment is 20% or more, but that insurance payment disappears when you have 20 percent in home equity.

Cons: The lower your credit score, the higher your interest rate. If you have a high debt-to-income ratio due to student loans, your mortgage insurance premiums could be higher, too.

• FHA mortgages

Pros: Interest rates are typically the same regardless of your credit score on FHA home loans, which require a down payment of just 3.5%. In addition, if you have good credit, a steady income and your mortgage payment will be similar to your rent, you could qualify with a debt-to-income ratio up to 50 or even 55%.

Cons: You'll need to pay mortgage insurance until you refinance or pay off your loan.

Student loan borrower advice

Eden says student loan borrowers should always make their payments on time, which improves their credit score.

"Student loans are complicated, so it's important to understand your payment and whether it is a graduated payment or an income-based repayment plan," says Eden. "It's easier to qualify for a loan if you have all that information in place."

Your best move if you have student loans is to consult with a mortgage lender who can help you determine which home loan option could match your needs.