Qualifying for a Mortgage with Student Loans

2019 Student Loan Guidelines

Fannie Mae Conventional Mortgage

  • IBR payments allowed - Even if payment is $0
  • Amortized Payment – Ok with all lenders
  • Deferred payments or loans in forbearance use 1% of loan balance.

Freddie Mac Conventional Mortgage – Effective November 1st, 2018

  • IBR Payment – May use payment as reported on credit report – Effective November 1st, 2018
  • $0 payment on credit report use .5% of loan balance – Effective November 1st, 2018
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use .5% of loan balance – Effective November 1st, 2018

FHA Government Insured Mortgage

  • IBR Payment – Not Allowed | Must use 1% of loan balance
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

VA Guaranteed Home Loan

  • IBR Payment – Not Allowed | Must use 5% of loan balance divided by 12
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

USDA Guaranteed Home Loan

  • IBR -Not Allowed | Must use 1% of loan balance
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

BuyWise Mortgage California - Buying or Refinancing a Home if you have student loans

New Freddie Mac Guidelines November 1, 2018

Big changes in the way student loan payments are calculated when you're trying to qualify for a home loan. Recently, Freddie Mac announced that starting November 1, 2018, they are going to again change the way that they calculate student loan payments when qualifying for a home mortgage.

Now, if you're here, it's probably because you're being given conflicting information, and that's not uncommon. That's actually more common than folks knowing or loan officers knowing exactly what the guidelines are, because they change all the time.

Why Don't Loan Officers and Lenders Know the Rules?

To be honest, most loan officers don't keep up on these kinds of things. Most lenders also do not keep on the changes, so they take the most conservative possible route and make it the most difficult that it can be possibly be for you to qualify.

Here's what the changes are. If you have student loans, if you're ... Well, let's back up a little bit.

When you are trying to qualify for a mortgage and you have student loans on your credit report, when the lender is calculating your debt to income ratio, which is how much debt you are showing or what your monthly payments are on your credit report, that calculation determines what the maximum payment you qualify for and therefore determines what the maximum purchase price or refinance amount is that you can qualify for for a mortgage.

What happened in 2015, and these guidelines just started going all over the place. What had ended up happening is anybody that had their loans that were in deferment or in forbearance, or if you have an income-based repayment plan, an IBR plan, for your student loans, what happened is the lenders ... Every single loan program, not lenders necessarily, but every loan program decided to treat that differently.

What the first thing that most loan programs did, and when I say programs, I'm talking about conventional loans that are underwritten by Fannie Mae or Freddie Mac or government loans that are underwritten that use USDA, VA, or FHA guidelines.

The 1% Rule

The big changes were if the loans were deferred or in forbearance, so there was no payment due, the loan guidelines were requiring lenders to use a calculation that was 1% of your student loan balance as a payment when calculating your debt to income ratio.

Now, if you have student loans, 20, 30, 50, 100,000, $200,000 or more, you can see where this would be a problem. There's no way you're going to qualify for a mortgage if you have a $1,000 fake calculation for your student loan payment. It just isn't going to happen.

What you need today to qualify for a mortgage is the loan has to be in some form of repayment status, or you have to use that 1% rule. The problem with the 1% rule is that lenders that don't want to deal with the guidelines are requiring that 1% rule across the board, whether you're across the board unless you are fully paying back your student loans.

Amortized vs Income Based Repayment

That means a fully amortized payment. Amortized payment, think of that as a car loan. You have a fixed term of how long you have to pay back the loan. By making monthly payments every month, it'll pay off the loan at the end of the term. That's a fully amortized loan.

All lenders, all underwriting guidelines will accept that payment on your credit report or on a statement from your lender as long as the student loan will be paid off by making those payments for the entire term.

With the Public Service Loan Forgiveness Program, that's where the challenges start coming in. With income-based repayment, that's where the challenge starts coming in. When your payment is based off of anything other than paying that loan off at the end of the term, that's where things get crazy.

All the details are here on the page. There's no way you're going to be able to follow all of those, but I'm going to run through them real quick now.

IBR - Income Based Repayment

Income-based repayment is the absolutely most common. If you're in a Public Service Forgiveness plan, chances are that that plan, you have to make payments for 10 years. Most folks that are in that plan to have their loan forgiven after 10 years worth of payments, they're in an income-based payment now.

It's based off of your disposable income after you pay all of your debts. Many times, that payment can be zero, but technically you are still in repayment. That payment, sometimes it's not zero. Sometimes it's $5, $15 on hundreds of thousands of dollars worth of loans. I've seen this. This is very, very common.

What are your options if you have less than a fully amortized payment? Your options right now to be able to use that payment is only conventional financing, conventional financing, which is loans underwritten by Fannie Mae or Freddie Mac.

Currently Fannie Mae is the only option if you have a zero payment on an income-based repayment plan. Freddie Mac, from 2015 until 2018, used to allow you to use the zero payment, and Fannie Mae did not. But in January of 2018, they switched positions. Fannie Mae now allows a zero payment. Freddie Mac does not.

Freddie Mac announced a new guideline for income-based repayment plans that is effective on November 1, 2018. Here's what it says. If your loan is in forbearance, or if it's deferred, or if you have an income-based repayment of zero payment, you can use a half percent of your student loan balance as the calculation for your debt to income ratio. Whereas Fannie Mae, if it's deferred or in forbearance, FHA or USDA, you're using 1%. VA has a little bit different calculation that comes out closer to Freddie Mac's half percent.

If you have any payment above zero and an income-based repayment, and you can prove that either from a statement from your student loan lender or on your credit report, you can now use that payment. In January, Freddie Mac required that that be a half percent of the loan balance. They're rolling that back, and they're now allowing us to use the payment as long as it's greater than zero.

Ask an Expert

That's the update. This page is always updated, because these things change all the time. It's very, very complicated, a little bit too complicated to completely explain the ins and outs and the nuances.

What I would suggest to you is look at this page and look for an expert. If you are on our website right now, we specialize in this. I have lender friends across the country that understand these guidelines, are familiar with these guidelines, and have experience with student loan guidelines.

If you're here because you're being told something different than what I'm talking to you about, feel free to reach out and contact me. If I can help, I will help. If I can refer you to somebody else that understands the guidelines in your state that you're trying to borrow in, then I can absolutely do that.

Stay informed. Keep asking questions, and I'm glad you found us, because we've been doing this for quite a few years. We're on top of these guidelines, and we know how to get you into a mortgage if you have income-based repayments.

If you are trying to buy a home, or refinance your current home in California, either give us a call, or click below to schedule a time that we can talk more about your situation.

We are experts with student loan guidelines and have a lot of experience helping folks qualify for a home mortgage loan when they have student loan payment.

BuyWise Mortgage California - Buying or Refinancing a Home if you have student loans