Home buyers paying off student loans are being denied mortgages not because their total debt load is too high but because their monthly debt payments exceed totals set by Fannie Mae and Freddie Mac’s underwriting standards, according to an analysis of four years of first-time buyer applications.

In an analysis of 46,000 applications from first-time home buyers over a four year period, loanDepot found that the difference between those who were approved and those who were not was not their debt-to-income ratios, FICOs or loan-to-value ratios but student loan debt payments that raised their monthly debt cost by $176 to $300 a month.

Among first-time home buyers who have been turned down for mortgages, average monthly student debt loads have increased from $344 to $400 from 2010 to 2014.  Over the same period, the percentage of monthly debt represented by student loans has risen to 13.4 percent for denied applications.  The average monthly student debt load for funded applications in 2014 is $312, representing only 9.5 percent of total monthly debt.

The difference between approved borrowers with student debt versus those who  were not approved when other factors like FICO, DTI, LTV were equal was a monthly student debt payment ranging from as low as $176 to $300 a month.

Student loan debt is one of the fastest rising sources of debt and is now the second largest component of household debt next to mortgage debt.  Outstanding student loan debt reported on credit reports rose to $1.08 trillion at the end of last year, a $114 billion increase for 2013.  About 11.5 percent of student loan debt balances are 90 days or more delinquent or in default.

Anthony Hsieh. CEO and chairman of loanDepot, said underwriting guidelines from the GSEs give lenders have no leeway on monthly debt payments. “The automated underwriting model the GSEs use isn’t under the control of lenders and we have little to no influence on how loans are evaluated within that system.  What makes it more challenging is that it’s a dynamic process that’s always changing.  New guidelines or rules are never published or disclosed. This means lenders, even lenders as large as loanDepot have no say in the underwriting standards and can’t be transparent with consumers. This puts everyone at a disadvantage. Lenders don’t know how to help credit worthy consumers become successful borrowers and consumers don’t know what they need to do or have in order to become successful borrowers.”

“College graduates who successfully use their student loans to earn their degree and who are putting it to good use while repaying their debt should be evaluated as such. They should be rewarded and recognized.  That’s what student loans were designed for, and there should be some type of consideration or exception in the form of a tax credit or leniency for that type of positive repayment behavior,” said Hsieh.