The Quick Read: Yes, often, because deferment by itself does not block an FHA cash-out refinance. The loans still count, though. FHA has the lender include a stand-in payment in your debt-to-income ratio, so deferment lowers your bills today without lowering the ratio the lender tests. Approval turns on that ratio, your equity, and the full file.
Why Doesn’t Deferment Make the Debt Disappear?
Deferment pauses what you owe the servicer. It does not pause what the mortgage lender must count. A lender testing your file asks one question: can this household carry the new mortgage plus every other debt it owes? A student loan that shows a zero payment is still a debt.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not an FHA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the FHA cap on a principal residence with the upfront premium financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
An illustration, not a Loan Estimate, an approval, a quote, or a commitment to lend. The rate shown is the weekly Freddie Mac thirty-year conventional benchmark, used as a market reference; an FHA cash-out is priced by the lender at lock, and this is not an FHA cash-out refinance quote. HUD’s cap limits the base loan; the upfront premium is financed on top of the capped base loan; the monthly premium for the first year follows the snapshot’s schedule. Cash available means the base loan the cap permits less the balances retired, before closing costs, which this calculator leaves out. The line figure applies the line program’s combined loan-to-value ceiling to the same value and balance. Taxes and insurance are estimates you can edit. Licensed in sixteen states for consumer mortgages.
That is the surprise for most borrowers. They see a zero payment on the credit report and assume it will read as zero in underwriting. It will not. The lender substitutes a figure, and that figure becomes part of your monthly obligations for the approval decision.
Here is the good news. A student loan raises your ratio. It does not disqualify you on its own. Plenty of borrowers with deferred loans clear the test, especially when the other debts are modest and the home carries healthy equity. The question is how much cushion you have, not whether the loans exist.
What Does an FHA Cash-Out Refinance Add to the Picture?
An FHA cash-out refinance replaces your whole mortgage with a new, larger one and hands you the difference in cash. Across the wholesale programs Lendmire places FHA files with, the cash-out is capped at 80% loan-to-value on a home you have owned and occupied for 12 months before the case number is assigned. That means at least 20% equity stays in the home.
Four features shape the file:
- Owner-occupancy. The home must be your principal residence. A rental or second home does not fit this program.
- Full appraisal. Cash-out requires one. Only the FHA Streamline skips it, and a Streamline cannot put cash in your hands.
- Credit. The wholesale programs Lendmire works with start at a 580 decision score. Some lenders set a higher floor or add their own requirements on top of FHA’s baseline.
- Mortgage insurance. FHA charges an upfront premium of 1.75% of the base loan, which can be financed. It also charges an annual premium between 0.15% and 0.75% of the balance, depending on term, loan amount, and LTV. Because a cash-out is capped at 80%, the shorter premium duration that applies to a thirty-year loan at or below ninety percent LTV is the one that applies here: the annual premium ends after eleven years.
The ratios come next. The base pair is 31/43, meaning housing costs over income and total debts over income, with no compensating factors. Documented compensating factors, such as strong reserves or a solid payment history, can stretch that to 40/50 at the top tier. Student loans feed straight into that second number, the total-debt ratio. Everything here is subject to lender guidelines and a full file review.
Key Terms Defined
Deferment: A period when the servicer lets you pause student-loan payments, usually for a qualifying reason such as school enrollment or hardship.
Forbearance: A servicer-approved pause that works like deferment for your bills but can differ in how interest is handled. FHA treats both statuses the same way for qualifying.
Debt-to-income ratio (DTI): Your monthly debts, including the new mortgage, divided by your gross monthly income. Lenders test it against program limits.
Placeholder payment: The stand-in monthly figure a lender uses when the credit report shows $0 for a student loan.
Income-driven repayment plan: A federal plan that sets your student-loan payment as a share of your income. The payment can be above $0 or exactly $0.
Adjusted value: The figure used for the 80% cap on a cash-out refinance. The appraisal drives it.
How Does an FHA Lender Count a Deferred Student Loan?
The lender counts it, using one of two figures. HUD’s Mortgagee Letter 2021-13 tells lenders to include all student loans in your liabilities, regardless of payment status. The calculation works like this:
- If the credit report or your documentation shows a payment above $0, the lender uses that payment.
- If the credit report shows $0, the lender uses 0.5 percent of the outstanding balance.
The letter states that it applies to all FHA-insured forward mortgage programs, and a cash-out refinance is one of them. The rule follows the date the case number was assigned, so a file whose case number was assigned under the current rule uses the 0.5 percent figure. Because the Handbook has been revised since then, the lender should confirm the current section text on your file.
This table shows what the lender counts for each status:
| Loan status | What the lender counts | Proof needed |
|---|---|---|
| Deferment, $0 reported | 0.5% of balance | Credit report |
| Forbearance, $0 reported | 0.5% of balance | Credit report |
| Income-driven plan, payment above $0 | The documented payment | Servicer letter |
| Income-driven plan, zero reported payment | 0.5% of balance | Servicer letter |
| Forgiven, discharged, or paid in full | Excluded | Written proof |
Two details matter most.
First, a lower payment than the credit report shows needs paper behind it. If a lender wants to use a payment below the reported one, the rule calls for written documentation from the creditor or servicer. That covers the actual payment, payment status, balance, and loan terms. For borrowers on income-driven plans, the servicer letter is the document that moves the file.
Second, exclusion takes more than a pause. The payment can drop out only when written documentation shows the balance was forgiven, canceled, discharged, or paid in full. Deferment does not qualify.
What Does the Math Look Like in Practice?
Run the numbers on a borrower, described in ratios and no dollar figures. Picture a homeowner with 30% equity, a mortgage already running on time, and a student-loan balance in deferment. The credit report shows $0.
The lender takes half of one percent of that balance as a monthly figure. It adds that figure to the car payment, cards, and the new, larger mortgage payment from the refinance. The total goes over gross income. If the result lands inside the program’s limits for that credit profile, the deal moves ahead. If it lands above, the borrower has options.
Notice what happens as the balance grows. The placeholder grows in lockstep. A balance twice the size doubles the stand-in payment. So large balances do the most damage to the ratio, even when no one is asking you to pay a dime today.
Now compare two versions of the same borrower:
- Version one keeps the loans deferred. The placeholder sits in the ratio. The cash-out is limited by the 80% LTV cap and by the DTI test.
- Version two uses part of the cash-out to retire the student loan at closing. If the lender’s guidelines allow paying off that debt through the refinance, the placeholder drops out of the ratio. The mortgage gets bigger, but the stand-in payment disappears.
Version two can turn a borderline file into a clean one. It is not free, though, and that leads to the next question.
Should You Pay Off the Student Loan With the Cash-Out?
It depends on what kind of student loan you hold. Retiring the debt with proceeds can improve your ratio, but it trades one kind of debt for another.
| Factor | Keep loans deferred | Pay off with proceeds |
|---|---|---|
| DTI effect | Placeholder stays in | Placeholder drops out |
| Loan protections | Stay in place | Gone once paid |
| Mortgage balance | Smaller | Larger |
| Mortgage insurance | On smaller base | On larger base |
| Flexibility later | Plan options remain | Fixed in the mortgage |
Federal student loans carry features a mortgage does not, such as income-driven plans, deferment, and potential forgiveness programs. Once the loan is paid off with a mortgage, those options are gone. You also pay mortgage insurance on a bigger base, and you stretch that debt across the mortgage term. Private student loans carry fewer protections, so this trade can be easier to justify there.
The stronger play for many borrowers is a middle path: pay off only the loan that causes the DTI problem, or only a portion, and leave the rest alone. This is a genuine toss-up for some households. A borrower expecting loan forgiveness should think twice before converting that debt into mortgage debt. A borrower with a high-balance private loan and no relief on the horizon often reaches the opposite conclusion.
What Can Block a Student-Loan Borrower Outright?
Ratios are fixable. A few problems are harder.
- Delinquent or defaulted federal debt. Federal loans in default can trigger a flag that stops an FHA file until the issue is resolved. A deferment does not cure a default.
- A weak payment history on the current mortgage. The lender documents the last 12 months of mortgage payments on a standard cash-out. Late payments there carry real weight.
- Collections or past-due accounts. These can sink a ratio or a credit profile, depending on the type.
- Credit events. HUD’s waiting periods apply after a bankruptcy or foreclosure: two years from a chapter 7 discharge, three years from a foreclosure. These are HUD rules, not a promise from any one lender.
If any of these apply, resolving them first usually beats applying and getting turned down.
How Can You Improve the File Before You Apply?
Start with the document, not the application. A handful of moves can change the outcome:
1. Pull the servicer paperwork early. Get the current balance, payment status, and loan terms in writing. If you are on an income-driven plan, get the letter showing your documented payment.
2. Check what the credit report shows. A $0 reported payment triggers the 0.5 percent placeholder. A documented payment above $0 may be lower than that placeholder, which can help.
3. Pay down other debts. Cards and auto loans compete with the placeholder for room in your ratio. Clearing one can offset a large student-loan stand-in.
4. Gather compensating factors. Reserves, a stable job history, and a clean mortgage record can support a file near the edge.
5. Match your plan to your timing. If you are weighing an enrollment change that sets a documented payment, talk to the lender first. The documented number only helps if it holds up in writing.
Servicing problems can slow this down. The CFPB’s report on resumption of payments found delays in income-driven plan processing and inaccurate billing statements. So request documents early and keep copies.
What If Your Deferment Ends Mid-Process?
The lender verifies status near the time of the decision, so a change can alter the number. If your deferment ends and a real payment starts, the lender will use the documented payment instead of the placeholder. That could be higher or lower. Tell the loan officer as soon as you hear from the servicer.
Look beyond the file, too. A deferment gives your household no payment today, but the mortgage qualifies you as if you were paying. When repayment resumes, the real payment may differ from the number used in underwriting. The CFPB’s return-to-repayment report found that borrowers with missed or deferred payments were more likely to be delinquent on other debts. Build your budget around what repayment will cost, not what deferment costs now.
Which Rules Are Out of Date?
Several old figures still circulate on blogs and forum posts. Here is what is stale:
- “Deferred loans don’t count.” They count. HUD’s 2021 letter tells lenders to include all student loans in your liabilities, regardless of payment status.
- “FHA uses 1 percent.” That was an older calculation. The current figure is 0.5 percent when no monthly payment is reported.
- “Cash-out goes to 85 percent.” HUD’s press release on cash-out refinance risk documents the cap dropping from 85 to 80 percent. Pages still showing 85 are stale.
- “No reported payment means no count.” A report showing no payment triggers the placeholder. It does not remove the debt.
- “Any FHA refinance gives me cash.” Only the cash-out refinance does. The Streamline and the rate-and-term do not.
- “Forbearance is the same as forgiveness.” Only documented forgiveness, discharge, or payoff allows exclusion.
One narrow exception exists for certain Hawaiian Home Lands mortgages, which sit outside the 80 percent cap. It applies to very few borrowers. For everyone else, 80 percent is the ceiling.
What Documents Will the Lender Ask For?
Expect the usual refinance package plus student-loan items:
- Recent pay stubs and income records
- Mortgage statements showing the last 12 months of payments
- Student-loan statements or servicer letters with balance, status, and terms
- Written proof of forgiveness, discharge, or payoff, if you want a loan excluded
- Documentation of any income-driven plan payment
Since consumer lending rules apply, you will receive a Loan Estimate and a Closing Disclosure as the deal works along. Review both. The documents spell out the costs of the new loan, including the financed mortgage insurance premium, and let you compare it against the loan you hold now.
Frequently Asked Questions
Do deferred student loans count against me on an FHA cash-out refinance?
Yes. FHA directs lenders to include student loans in your liabilities regardless of payment status. A deferred loan with a $0 credit-report payment is counted at 0.5 percent of the balance. The only way to remove it is written proof of forgiveness, discharge, or payoff.
Can I use a lower payment than the placeholder if I am on an income-driven plan?
Sometimes. If your plan sets a documented payment above $0, the lender uses that figure, which may be lower than the 0.5 percent placeholder. You need servicer documentation showing the payment, status, balance, and terms. A $0 income-driven payment does not help, because the placeholder applies again.
Can I pay off my student loans with the cash-out proceeds?
Often, subject to lender guidelines. Retiring the debt at closing can remove the placeholder from your ratio. The tradeoff is losing federal loan protections and carrying that debt inside a larger mortgage with mortgage insurance on the bigger base. Weigh that against your loan type and plans.
Does my current mortgage have to be an FHA loan?
Not necessarily. The cash-out refinance replaces your existing mortgage, so the loan you hold now can be a different type. What matters is that you meet the program’s owner-occupancy, ownership, and equity tests, including the 12 months of ownership and occupancy and the 80 percent LTV cap. Lender guidelines and a full file review decide the rest.
What if my federal student loan is in default?
A defaulted federal loan can stop an FHA file until it is resolved. Deferment does not fix a default. Working with the servicer or the Department of Education to bring the loan current comes first, and the lender can tell you what documentation it needs afterward.
The Takeaway for Borrowers in Deferment
If your ratio can absorb the placeholder, you can move ahead. If it cannot, a payoff, a documented plan payment, or smaller debts elsewhere may close the gap.
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Program details are subject to lender guidelines and full file review, and nothing here is a commitment to lend. You can reach the team at 828-256-2183.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s FHA loan programs page.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Get Started
Ready to find the right loan for you?
See your offer in seconds. No credit pull, no obligation.
Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. HUD Mortgagee Letter 2021-13
2. CFPB: Issue Spotlight on return to repayment
3. CFPB: Student Loan Return to Repayment Report
4. HUD press release on cash-out refinance risk
This article is part of Lendmire’s FHA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: How Much Cash Comes Out of an FHA Cash-Out Refinance Instead of Selling? · Banks That Offer an FHA Cash-Out Refinance to Maximize Your Cash Out
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.