The Quick Read: A student loan in deferment still counts against you when a lender underwrites a cash-out refinance. The lender swaps in a substitute monthly payment, adds it to your debt-to-income ratio, and then tests your equity, credit, and appraisal. Deferment pauses the bill. It does not pause the math. Each loan program picks its substitute payment differently, so the same borrower can look stronger under one than another.
Key Takeaways
- A “$0 due” student loan is not treated as $0 on most conventional and FHA files. The lender uses a calculated payment instead.
- Conventional cash-out tops out at 80% loan-to-value on a one-unit primary residence and 75% on two- to four-unit homes.
- The first mortgage must be at least 12 months old, and you must have been on title for 6 months, with limited exceptions.
- Documentation from your servicer, showing the balance, the status, and the future payment, often decides how the loan is counted.
- Paying student loans off with the proceeds is possible in some structures, but partial payoffs are generally not allowed in the program built for that purpose.
How Does a Lender Underwrite This Loan, Step by Step?
A lender reads your credit report, replaces any $0 student loan payment with a substitute figure, and runs your debt-to-income ratio. It then orders an appraisal to set the maximum loan. Credit, income, and the program you pick decide the rest.
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: 7.24% as of October 29, 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.
Here is the sequence on a typical file:
1. Credit pull. The report lists each student loan with a balance and a reported payment. A deferred loan often reports $0.
2. Substitute payment. The lender cannot leave $0 in the ratio unless the program allows it with proof. It uses a calculated amount instead.
3. Debt-to-income. The substitute payment joins the new mortgage payment and your other monthly debts. The automated finding governs most files, with a total ratio ceiling of 50% across the wholesale conventional programs we place files with. Manually underwritten loans run tighter, at 36% or 45%, depending on reserves and score.
4. Appraisal and leverage. The appraised value caps the new loan. That cap, not your wish list, sets how much cash you can take.
5. Closing costs. If you finance them into the new loan, they reduce the cash that reaches you.
Lendmire’s cash-out refinance programs page lays out how these loans are arranged. Lendmire is a mortgage broker. It places the loan with a wholesale lender, and that lender reviews the full file.
Why a Paused Payment Still Counts
Lenders protect against a bill that is about to restart. If deferment ends in a few months, a paused payment today says little about your budget next year. So the underwriting rules assume a real payment is coming and ask you to carry it on paper now.
Here is the catch. The payment on paper can run higher than what you will actually owe under an income-driven plan. It can also run lower than a standard repayment schedule. Neither is a prediction. It is a rule of thumb the program applies so every borrower is measured the same way.
Key Terms Defined
Deferment: A period when you are allowed to pause student loan payments. Interest may or may not build up, depending on the loan type.
Forbearance: A pause or reduction in payments granted by your servicer, during which interest generally keeps accruing.
Debt-to-income ratio (DTI): Your total monthly debt payments divided by your gross monthly income. Lenders use it to judge whether a new payment fits.
Loan-to-value (LTV): The new loan amount divided by the home’s appraised value. A lower number means more equity left in the home.
Substitute payment: A payment the lender calculates when the credit report shows $0. It stands in for your real payment inside the DTI.
Seasoning: The minimum time you must have held a loan or title before a lender will refinance it.
How Do Fannie Mae, Freddie Mac, FHA, and VA Count a Deferred Loan?
Each program counts it, but not the same way. Fannie Mae and Freddie Mac set different substitute payments. FHA counts the loan regardless of payment status. VA depends on the lender and the underwriting that applies to a VA cash-out.
| Program | Treatment of a deferred loan |
|---|---|
| Fannie Mae | Substitute payment, or documented $0 on income-driven plans |
| Freddie Mac | Must be an amount above zero |
| FHA | Loan included in liabilities regardless of status |
| VA cash-out | Full underwriting; lender overlays may apply |
Fannie Mae’s Selling Guide says installment debt, student loans included, counts toward recurring monthly obligations when more than ten payments remain. Its selling FAQ adds that for a deferred or forbearance loan, a lender may use a set percentage of the balance. A fully amortizing payment from the documented repayment terms is the other option. That percentage can be lower than the true amortizing payment. If the loan sits on an income-driven plan and the paperwork verifies that the required payment is zero, Fannie Mae allows the loan to be counted at zero.
Freddie Mac’s Guide is stricter on that last point. For loans in deferment, forbearance, or repayment, it requires an amount greater than zero in the DTI. A smaller percentage of the balance applies when the credit report shows $0, unless the file documents a different amount.
On the FHA side, HUD Mortgagee Letter 2021-13 tells lenders to include all student loans in the borrower’s liabilities regardless of payment status. It replaced an older calculation built on a percentage of the deferred balance. FHA standard cash-out is limited to owner-occupied principal residences and carries a lower leverage cap than FHA rate-and-term.
For VA borrowers, the streamline (IRRRL) is not a cash-out product. It only refinances an existing VA loan and gives no cash. A VA cash-out requires an appraisal and full underwriting, so your student loans get the same scrutiny described above.
The practical read: if you hold a documented $0 income-driven payment, conventional Fannie Mae files may treat you most kindly. If you do not, the lower substitute percentage can make the other conventional path more attractive. Your loan officer should run both before you commit.
What Documents Do You Need?
Expect to hand over servicer paperwork. Credit reports lag, and lenders want proof of the current status. A typical package includes:
- A recent statement or servicer letter showing the balance and deferment status.
- The date deferment ends and the payment that follows.
- For income-driven plans, written verification of the calculated payment, even if the plan shows no required payment.
- For forgiveness or discharge situations, the approval letter or program documentation.
Gather these before you apply. Missing paperwork often pushes a lender to the less favorable default calculation.
How Much Can You Borrow, and What Else Is Tested?
Conventional cash-out is written at 80% LTV on a one-unit principal residence and 75% on two- to four-unit principal residences. Second homes and investment property also sit at 75%. Occupancy sets the leverage. In Texas, a cash-out on a homestead is capped at 80% of the home’s value by the state constitution, and the wholesale lane described below is not written there. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Other requirements across the wholesale conventional programs we place files with:
- Credit: programs start at a 620 decision score, and 640 on an adjustable rate under manual underwriting.
- Seasoning: the first mortgage you are paying off must be at least 12 months old, and you must have been on title for 6 months. Delayed financing, inheritance, and legal-award situations carry exceptions.
- Mortgage insurance: required above 80% LTV on the agency path, though the wholesale no-mortgage-insurance cash-out lane described next is the one exception to that rule. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
That lane reaches 89.99% LTV with no mortgage insurance. It needs a 680 score and a 50% ratio on a thirty-year fixed rate. The home must be a primary residence with a conforming balance, and it carries its own six months of seasoning. Because your student loan substitute payment sits inside that 50% ceiling, a large deferred balance can be the line between fitting and not fitting.
Equity is only part of the picture. All program figures are subject to lender guidelines and full file review.
Where the General Rule Breaks
A few named situations change the outcome:
- Paying off the student loans with proceeds. Fannie Mae has offered a student-loan payoff variant of cash-out. The loan must be paid in full with proceeds, partial payoffs are not permitted, and cash back is limited. Whether a lender offers it today depends on current guidelines, so confirm before you plan around it.
- Documented $0 income-driven payment. Fannie Mae can accept it. Freddie Mac and FHA do not.
- Forgiveness or employment-contingent repayment. Freddie Mac describes cases, such as a deferred loan whose full balance will be forgiven, canceled, or discharged at the end of the period, where the payment is handled differently in income calculations. Approval documentation is required.
- Limited cash-out versus cash-out. A rate-and-term (limited cash-out) refinance is a different product. It allows only small incidental cash back and carries different leverage, up to 95% LTV on a one-unit primary residence. If you want cash, you are in cash-out territory with its tighter cap.
- Policy changes. Federal deferment and forbearance rules are being revised. Check with your servicer before relying on a plan that may change. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
What Does Deferment Cost You While You Wait?
It depends on the loan. The CFPB explains that on a subsidized federal loan you do not pay interest during deferment, while on an unsubsidized loan you remain responsible for interest. Interest that builds up and gets added to the principal raises the balance, and with it the substitute payment a lender calculates.
Picture a homeowner whose unsubsidized loan has been quietly growing for two years. On paper, the DTI is heavier than it was at the start of deferment. That is why timing matters. A lender uses the balance on the day it underwrites, not the balance you remember.
If you use proceeds to retire a deferred loan, you also give up whatever deferment time remains. Federal loans carry protections, such as income-driven plans and forgiveness programs, that disappear once the debt is paid. Private loans may not offer those protections at all, so the tradeoff differs. Unsecured debt also becomes debt secured by your home. Missing a payment on it can mean foreclosure risk rather than a collection call.
What Does the Decision Look Like in Practice?
Say you hold a mix of one federal loan in deferment and one private loan in repayment, and you want cash for a home project. Start with the substitute payment on the federal loan. Then check your DTI against the program ceiling. Next, compare what the appraisal allows against your equity. If the numbers fit, pick the program whose rule treats your paperwork best.
If they do not fit, the usual levers are modest. You can document a lower income-driven payment where the program allows it. You can pay a small loan off outright before applying. Or you can borrow less, which lowers the new mortgage payment and the LTV together. Each lever has a cost, so run it before you commit.
Frequently Asked Questions
Do I have to leave deferment before I can refinance?
No. You can apply while a loan is deferred. The lender counts it using the program’s substitute payment or documented amount, so leaving deferment is not a condition. Starting repayment first can help if it produces a documented lower payment than the substitute figure, but check how your loan type is counted.
Will interest that built up during deferment be included in what I owe?
Yes, if interest accrued or capitalized, the payoff balance includes it. On an unsubsidized loan, interest keeps running during deferment, per the CFPB. Ask your servicer for a payoff statement dated near closing, because the figure can change between application and funding.
Can I pay off only part of a student loan with the proceeds?
In the program built specifically for student loan payoffs, no. The loan must be paid in full with proceeds. In a standard cash-out, you can use your cash for any purpose, including a partial payment, but the payoff is then your own choice and not a program feature.
Can I use a cash-out refinance to pay off a family member’s student loans?
That depends on the program and the lender’s guidelines. Payoff programs generally tie the debt to the borrower on the mortgage. A standard cash-out leaves the use of funds to you, but a family member’s loan would not reduce your own DTI. Confirm with the lender before you plan around it.
Do I lose federal protections if I pay the loans off?
Yes. Once a federal loan is paid, you can no longer use income-driven repayment, deferment, forbearance, or forgiveness programs on that balance. Weigh that loss against the equity cost before you move forward.
Comparing Your Options
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. Call 828-256-2183, or start with Lendmire’s cash-out refinance programs page. A broker can run your deferred student loans through each program’s rules side by side, so you see how the same file reads under each.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. 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. Fannie Mae Top Trending Selling FAQs
3. Freddie Mac Guide Section 5401.2
4. HUD Mortgagee Letter 2021-13
5. CFPB: What Is Student Loan Deferment
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Best Cash-Out Refinance Program Before Seasoning Is Met · Best Cash-Out Refinance Program With Cash Reserve Requirements to Meet · Cash-Out Refinance Lenders on a Historic Home
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.