The Quick Read: Deferred student loans still count in the debt-to-income math on most loan types, even though you pay nothing today. The lender puts a “future” payment on paper, and the formula depends on the loan program. VA is the main exception, and paying the loan off at closing can change the picture entirely.
Key Takeaways
- Deferment pauses your bills. It does not pause the underwriting math.
- Conventional and FHA loans count a stand-in payment based on your balance. VA can count $0 with proof of long deferment.
- A documented income-driven payment, even $0, is treated differently from deferment.
- Paying a student loan off with cash-out proceeds removes its payment from the ratio, but it adds to your new mortgage balance.
- The same loan can produce different ratios under different programs. Program choice matters.
What Is a Cash-Out Refinance, and Why Do Deferred Loans Matter?
A cash-out refinance replaces your current mortgage with a larger one and hands you the difference. Lenders limit how much equity you can pull. On a one-unit primary residence, the conventional limit is 80% loan-to-value (LTV), meaning the new loan can be up to 80% of the home’s value. For two- to four-unit homes, second homes and investment property, the conventional limit is 75%.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
One wholesale lane reaches 89.99% LTV with no mortgage insurance. It needs a 680 score, a 50% total ratio, a thirty-year fixed rate, a primary residence and a conforming balance. It also carries its own six months of seasoning. That lane is the exception to the usual rule that mortgage insurance applies above 80%. Every figure here is subject to lender guidelines and full file review.
Deferred student loans matter because lenders judge your ability to carry the new payment. They compare your monthly debts to your monthly income. That comparison is the debt-to-income ratio, or DTI. A deferred loan has a balance and will have a payment someday. So the lender must put something in the DTI.
Lendmire’s cash-out refinance programs page lays out the equity limits. Lendmire is a mortgage broker. It shops your scenario across wholesale lenders and matches it to a program. It does not lend.
How Do Lenders Underwrite This Loan, Step by Step?
Underwriting a cash-out refinance with deferred student loans follows a set order. Each step changes what comes next.
1. Classify the transaction. Paying off a student loan with proceeds makes it a cash-out refinance, not a rate-and-term refinance. Cash-out carries lower maximum LTVs than a rate-and-term loan, which reaches 95% on a one-unit primary residence.
2. Pull credit and list every student loan. The credit report shows each balance, its status (deferred, forbearance, income-driven or repayment) and any reported payment.
3. Choose the qualifying payment. The program, not the lender’s mood, sets the formula. The next section covers the formulas.
4. Collect documents. Expect servicer statements, deferment or forbearance letters showing the end date, and income-driven plan paperwork.
5. Run DTI. The lender adds the new housing payment, the qualifying student loan payment and your other monthly debts. It then divides by your income. The automated finding governs most conventional files, and the total ratio ceiling on the wholesale conventional programs is 50%.
6. Order the appraisal. A cash-out generally needs one. The appraisal does not change how the student loan is counted. It sets your home value, which sets the maximum loan.
7. Close and pay off. If proceeds retire a student loan, the lender sends the money straight to the servicer. Payoff conditions get cleared before funding.
Credit matters too. The wholesale conventional programs start at a 620 decision score. Some adjustable-rate or manually underwritten files need more. Seasoning applies as well: the mortgage you are paying off should be at least 12 months old, and you should have been on title for at least 6 months, with exceptions for delayed financing, inheritance and legal awards.
How Does Each Loan Program Count a Deferred Loan?
Each program counts deferred student loans differently. Conventional loans use a percentage of your balance. FHA uses a smaller percentage. The agencies set these formulas.
| Program | Deferred loan with $0 reported payment | Paperwork that changes the result |
|---|---|---|
| Fannie Mae | 1% of balance, or a fully amortizing payment | Income-driven plan letter showing $0 |
| Freddie Mac | An amount greater than zero | Forgiveness or cancellation proof |
| FHA | 0.5% of balance | Servicer statement with actual payment |
| VA | $0 if deferred for the required period past closing; else 5% of balance ÷ 12 | Written deferment proof |
Here is where each rule comes from. Fannie Mae’s Selling Guide, section B3-6-05 lets the lender use the payment on the credit report. If that payment is wrong, the lender may use the most recent statement. For deferred or forborne loans, it allows 1% of the outstanding balance or a fully amortizing payment from the documented terms.
Freddie Mac’s Guide, section 5401.2 is the official source for that company’s rule. Secondary summaries say it requires an amount above zero for loans in deferment or forbearance.
HUD Mortgagee Letter 2021-13 tells FHA lenders to include all student loans in your liabilities, whatever their payment status. It offers a 0.5% of balance option when the amount reported on the credit file is zero. Before that change, FHA used 2%.
VA is the outlier. Under VA Circular 26-17-02, a lender need not count a payment if you give written evidence that the debt will stay deferred for a sustained period after closing, and how long that period must be depends on the circular and on the lender’s review of your file. If repayment is active or starts within that window, the lender counts 5% of the balance divided by 12.
Individual lenders can add overlays that are stricter than these agency rules. Some set a higher floor on the placeholder.
A Worked Example
Picture a homeowner whose DTI sits at 44% before any student loan counts. Those numbers are modeled assumptions, not market data. The homeowner has a large deferred federal balance. Suppose a 1% rule produces a placeholder payment that adds about six points to DTI. That lifts the ratio to roughly 50%, right at the ceiling of the wholesale conventional programs. The file is borderline, and a small change in income or debts could tip it.
Now consider the payoff path. The homeowner takes cash-out proceeds, pays the student loan in full at closing, and the lender sends funds directly to the servicer. The placeholder payment drops out of DTI. The new mortgage balance is larger, so the mortgage payment rises a little. In this modeled case the ratio could land lower than on the keep-deferred path, because the placeholder came from a balance counted at a percentage every month.
Both versions depend on the equity available. Cash-out is capped at 80% LTV on a one-unit primary home on the conventional side, and a DSCR cash-out loan is capped lower, at 75% LTV. A payoff only works if the loan amount, including the student balance, fits under the applicable cap. Whether the payoff beats keeping the loan deferred depends on your numbers. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Where Does the General Rule Break?
The general rule is that deferred loans count. Five situations bend it, and a sixth point about occupancy changes the leverage but not the student loan rules.
Fannie Mae’s student loan cash-out refinance. Selling Guide B2-1.3-03 describes a named option for paying off student debt. At least one student loan must be paid off with proceeds, paid directly to the servicer at closing. At least one borrower must owe the loan, and it must be paid in full. Partial payments are not allowed. Cash back to you cannot exceed the greater of 1% of the new loan amount or $2,000. The loan runs through Fannie Mae’s automated underwriting system, and the standard cash-out LTV limits still apply.
Not every student-loan payoff qualifies for this treatment. Other borrowers with deferred loans are underwritten as ordinary cash-out.
Income-driven plans versus deferment. Borrowers often confuse these. If you are on an income-driven plan and your servicer documents that your actual required payment is zero, Fannie Mae can accept that zero in the debt calculation. A deferred loan gets the 1% or fully amortizing treatment instead. The paperwork decides which one you are.
Deferment ending soon. VA counts the loan if repayment starts shortly after closing, and the exact window depends on the program’s rules and the lender’s review of the file. Conventional and FHA formulas do not look at the end date. So the same ending deferment helps you under one program and not another.
Forgiveness or cancellation. Freddie Mac has narrow exclusions, such as a loan close to full forgiveness. These need proof from the loan program or employer, not a borrower’s word.
Streamlines. The FHA Streamline and VA IRRRL apply to existing government loans. They are rate-and-term products, so they carry no cash-out. A non-credit-qualifying FHA Streamline involves limited credit review, so the student loan may never enter the math. A credit-qualifying one does check DTI. The VA IRRRL does not allow cash out at all.
Occupancy. Second homes and investment property have lower LTV caps, though the student loan payment rules do not change with occupancy.
Should You Pay Off the Loan or Leave It Deferred?
It depends on your goals, and the decision has real costs. Paying off the loan can improve your ratio and clear a condition. Leaving it deferred keeps the loan outside your mortgage.
Here is what to weigh:
| Factor | Pay off at closing | Leave it deferred |
|---|---|---|
| DTI effect | Placeholder removed | Placeholder counted |
| Loan amount | Larger new mortgage | Smaller new mortgage |
| Federal protections | May be lost once refinanced | Stay in place |
| Debt security | Tied to your home | Unsecured |
The last two rows carry the weight. Federal student loans come with options that a mortgage does not offer. Refinancing them into a mortgage may end those protections. You are also converting debt that the lender cannot seize into debt secured by your house.
Honestly, this is a genuine toss-up for many borrowers. A payoff can rescue a borderline file. But if your federal loan has forgiveness or income-based options you still value, keeping it separate may be worth the tighter ratio.
What Documents Do Lenders Ask For?
Lenders ask for documents that prove the loan’s status and the payment. Request them early, because servicers set their own pace.
- The most recent servicer statement for each loan.
- A deferment or forbearance letter showing the start and end dates.
- Income-driven plan paperwork showing the actual payment, if that applies.
- Forgiveness or cancellation evidence, if you claim an exclusion.
- For VA, a statement dated within 60 days of closing, per the VA’s own lender training material.
Mismatches slow files down. If the credit report and the servicer statement disagree, the lender must pick the supported figure. Under the conventional rule, a statement can replace a wrong credit report payment. Resolving the conflict before you apply keeps the file clean.
Key Terms Defined
Debt-to-income ratio (DTI): Your monthly debt payments divided by your monthly income, including the new mortgage.
Deferment: A period when a servicer lets you pause student loan payments, sometimes while interest still builds.
Forbearance: A temporary pause or reduction of payments. Fannie Mae groups it with deferment.
Income-driven repayment plan: A federal plan that sets your payment from your income, which can be $0.
Qualifying payment: The monthly amount a lender counts for a debt in DTI, whether or not you pay it today.
Loan-to-value (LTV): The loan amount divided by your home’s appraised value, shown as a percentage.
Seasoning: The waiting period a loan or ownership must meet before a refinance.
How Do You Prepare Before You Apply?
Preparation shrinks surprises. In practice, the files that go smoothly have three things in place before application.
First, know your status. Log in to each servicer account. Note whether each loan is deferred, in forbearance, income-driven or in repayment, and when any pause ends.
Second, gather paperwork. Download statements and request letters now. If you are on an income-driven plan, get the servicer document showing the actual payment.
Third, compare paths. Ask for the file to be run both ways: with the loan counted and with it paid off. The best program for your situation depends on your balance, equity, credit profile and how much cushion you have under the ratio ceiling. A broker that shops multiple wholesale lenders can match the scenario to the program whose formula fits it. The lenders that write these files differ on overlays, so the same borrower may see different results.
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.
Frequently Asked Questions
Does having student loans in deferment disqualify me from a cash-out refinance?
No. Deferment alone is not a disqualifier. Lenders count a stand-in payment, and whether you clear the ratio depends on your balance, income and the program. A larger balance means a larger counted payment under percentage rules. Approval is subject to lender guidelines and full file review.
Is forbearance treated differently from deferment?
Not under Fannie Mae’s rule, which groups them together. Both get the same 1% or fully amortizing treatment. The exact formula still depends on the program, so confirm which one your file would use.
What if my credit report shows a zero payment?
A zero payment on the report does not mean zero in underwriting. Fannie Mae asks for further documentation. The exception is a documented income-driven payment that is genuinely zero, which can be treated as no added obligation in the debt ratio.
Can I use cash-out proceeds to pay off the student loan?
Yes, and the lender typically pays the servicer directly at closing. That removes the payment from your ratio. Fannie Mae’s student loan cash-out option requires full payoff of at least one loan. It also limits cash back to you to the greater of 1% of the new loan or $2,000.
Do I lose federal protections if I pay off a federal student loan with a mortgage?
Yes, you may. Paying off a federal loan with mortgage proceeds can end the repayment options and other borrower benefits that came with it. Review your loan’s terms at studentaid.ed.gov and weigh that loss before you commit.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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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. Fannie Mae Selling Guide B3-6-05: Monthly Debt Obligations
2. Freddie Mac Guide Section 5401.2
3. HUD Mortgagee Letter 2021-13
5. Fannie Mae Selling Guide B2-1.3-03: Cash-Out Refinance Transactions
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Is a Cash-Out Refinance Worth It for a Large Expense? · How Lenders Underwrite a Cash-Out Refinance and Which Documents Lenders Require to Close · How Much Cash Can You Pull Out With a Cash-Out Refinance?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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- 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.