Mortgage Qualifying with Student Loan Debts

Texas Residents:

For home buyers or homeowners with student loan debt in planning to purchase or refinance a home, it’s important to know that the type of mortgage you apply and the type of repayment plan your student loans are set up on can impact qualifying for a mortgage.  

For example, the student loan repayment calculation guidelines for Income Based Repayment (IBR), Income Driven (IDR), Graduated, PAYE or REPAYE plan can vary widely depending on if you are apply for Conventional (Fannie Mae or Freddie Mac), FHAVA, or USDA home.

Currently, there is quite a bit of confusion about what payment amount should be included in a buyers debt to income, DTI ratio, when student loans are in an Income-Based plan.

The primary reasons for so much confusion is from extremely outdated and inaccurate information on the Internet, lender’s additional conditions, underwriters interpreting the published rules differently, and Mortgage Loan Officers not keeping up with the changes.

This article includes the MOST UPDATED mortgage qualifying guidelines for buyers with student loans in some sort of Income Based Repayment Plan (IBR), Income Driven Repayment (IDR) plan, Graduated, PAYE or REPAYE plan.

Fannie Mae and IBR Student Loan Guidelines

Fannie Mae insures Conventional loans.

If Payment Reports on Credit: The reported amount can be used for qualifying purposes.  This includes IBR/IDR/PAYE/REPAYE repayment plans.

If No Payment (or $0 payment) Reports on Credit: Lender must use either 1% of the outstanding student loan balance or a calculated payment that will fully amortize the loan based on the documented loan repayment terms.

Special Note: If a parent, grandparent, relative, fiance/boyfriend/girlfriend has been making the payment on a student loan debt (or any installment debt) for the last 12 months, that payment can be excluded from the applicants DTI ratios.  This applies even if the person is not obligated on the student loan or installment debt but cannot be an interested party (seller, Realtor or Lender) to the transaction

Reference: Selling Guide Announcement SEL 2017-04 and Selling Guide B#-06-05

Freddie Mac and IBR Student Loan Guidelines

Freddie Mac insures Conventional loans.

If Payment Reports on Credit: The reported amount can be used for qualifying purposes.  This includes IBR/IDR/PAYE/REPAYE repayment plans.  If $0 payment reports we may be able to use that payment in qualifying.

If No Payment Reports on Credit: Lender must use either 1% of the outstanding student loan balance, the proposed payment, or a calculated payment that will fully amortize the loan based on the documented loan repayment terms.

Reference: Freddie Mac Loan Product Advisor Guideline Matrix

FHA Mortgage and IBR Student Loan Guidelines

Regardless of the payment status, the lender must use either:

  • The Greater of:
    • 1% of the outstanding student loan balance
    • the monthly payment reported on credit
    • Actual documented payment that will amortize (pay off) the loan over it’s term

FHA HUD 4000.1 manual (994 pages)

VA Mortgage and IBR Student Loan Guidelines

  • Lender may use the Income Based Repayment (IBR) payment if it is verified (including $0.00) when the payment is fixed for a minimum of 12 months from the closing date.
  • When the payment is fixed for less than 12 months from the closing date, the lender must use the regularly calculated payment once the IBR ends.
  • When no payment is reported or available, the lender must use a payment calculation using 5% of the current balance, divided by 12 (months) as the qualifying payment.

Reference: VA Circular 26-17-02

USDA Mortgage and IBR Student Loan Guidelines

If Payment is Not Fixed:  If a student loan repayment is based on the borrowers income (IBR/IDR) and adjustable, or graduated USDA requires all lenders use 1% of the student loan balance be used for calculation in the DTI ratio.

If Payment is Fixed: The lender may use the fixed payment established on student loans when the lender obtains documentation verifying the payment, interest rate, and loan term will not adjust. The borrower must provide evidence from the student loan servicer that the payment will not change.

Reference: USDA Rural Development (RD) 3555 Handbook

Get the Facts & Know Your Options

Contact me at (512) 799-0133 if you would like to ask a question about how much you will qualify for with your student loan debt, or ask to learn more about the various down payment assistance programs you may be eligible for.

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