2018 Guide to Qualifying for a Mortgage with IBR Student Loans
When you have student loans, qualifying for a mortgage can get tricky.
Student loan guidelines have changed yet again. This is your ultimate guide to understanding how these changes will affect you in 2018.
Understanding IBR
When you begin to make payments on your student loans, you may have several options.
You may be making payments on your student loan based on your income. This is called an Income Based Repayment (IBR) plan.
IBR plans typically will not cover the principal and interest due, and the loan balance may increase even though you are making payments.
If your payment is based on a calculation that pays off your loan in full at the end of a loan term, this is an amortized payment.
All underwriting guidelines with all lenders will allow you to use an amortized payment when calculating your debt to income ratio.
IBR plans could also leave you with a $0.00 payment, even though your loan is in repayment status. Your income is reviewed every year to determine your new payment over the next year.
Student Loan Payment Change History
More and more students are straddled with student loan debt for years after leaving school.
Being chained to student loan debt requires an experienced locksmith to unlock the correct guidelines to get you approved for a home loan.
It’s almost a full time job keeping up with the updates to the underwriting guidelines, and IBR payments seem to send many loan officers into a tail spin of misinformation.
Student Loan Guideline Changes Since 2015
2 times for Fannie Mae Conventional Loans
2 times for Freddie Mac Conventional Loans
1 time for FHA Insured Loans
2 times for VA Guaranteed Loans
1 time for USDA Guaranteed Loans
The first major change to the underwriting guidelines happened when lenders were no longer allowed to ignore deferred payments or loans in forbearance.
The second major change was that you had to apply a payment to any student loan balance. If the payment reporting on your credit report will not pay off the loan at the end of a fixed term, your payments are not amortized.
Non-amortized payments became public enemy #1 by Fannie Mae, FHA, and USDA. In 2015, Freddie Mac guidelines did not allow for deferred payments or loans in forbearance, and would allow IBR payments, even if the reported payment is $0.00.
Calculating Your Debt to Income Ratio (DTI)
The entire student loan debacle is being caused by confusion around how your debt to income ratios are calculated.
Your debt to income ratio is calculated as your proposed housing payment (when buying a home) plus your monthly liabilities from your credit report, as a percentage of your gross income.
When using a Fannie Mae or Freddie Mac Conventional loan, the total housing payment plus monthly liabilities cannot exceed 50% of your gross income, or a 50% DTI.
Borrowers using a FHA mortgage have 2 DTI ratios. A front-end debt to income ratio is your housing payment as a percentage of your income. A back-end debt to income ratio includes your monthly liabilities from your credit report.
FHA will allow your housing payment to be as high as 46.99% front-end DTI, and a maximum 56.99% back-end DTI including your debts.
Student loans become confusing when no payment is reported on your credit report, or when your payment is an Income Based Repayment (IBR) payment.
2018 Student Loan Guidelines Snapshot
Fannie Mae Conventional
Non-amortized Payment – IBR Ok, even with $0.00 payment – Updated April, 2017
Amortized Payment – Ok with all lenders
Deferred or forbearance use 1% of loan balance.
Freddie Mac Conventional
Non-amortized Payment – Must use .5% of loan balance – Updated February, 2018
FHA Government Insured
Non-amortized Payment – Not Allowed | Must use 1% of loan balance
VA Guaranteed Loan
Non-amortized Payment – Not Allowed | Must use 5% of loan balance divided by 12
USDA Guaranteed Loan
Non-amortized Payment -Not Allowed | Must use 1% of loan balance
Freddie and Fannie Swap Guidelines
Interestingly enough, Fannie Mae and Freddie Mac have since swapped positions on IBR payments as of the most recent update by Freddie Mac in February 2018.
Freddie Mac no longer allows for IBR payments, while Fannie Mae does since April 2017. Fannie Mae will even allow an IBR payment with a $0.00 payment.
If you have an IBR payment that is equal to less than .5% of the balance of your student loan, Fannie Mae is your option for being able to use the payment as reported on your credit report.
Creative Solutions to Solve Student Loan Problems
If you are trying to buy a home, and the pieces just aren’t fitting together, here are some creative solutions that past clients have successfully done.
Payments Deferred or Loan in Forbearance
If you have loans with deferred payments, or if your loan is in forbearance, we have had homebuyers go into an income based repayment plan, and qualify using a Fannie Mae Conventional
Parents Co-Sign and Pay Student Loan Payment
Fannie Mae recently updated their “Contingent liability” guideline to allow student loan payments to be ignored, if you can show that a co-signer has made the payments for the past 12 months.
Debt to Income Ratio too High for Conventional
This home buyer is consolidating over a dozen loans into a 30 year amortized payment. We needed an amortized payment to take advantage of more flexible DTI requirements over Conventional.
Payment Not Showing Up on Credit Report
If you loan is in repayment, your lender can get a credit supplement (if needed) from the credit bureau by providing them with a copy of your statement from your student loan lender.
Have Less than 5% Down Payment and IBR Payment
It is a common misunderstanding that FHA offers the lowest down payment. VA & USDA offer 100% financing, but additional qualifying is required.
Both Fannie Mae and Freddie Mac have programs that allow for as little as a 3% down payment. Eligibility can be determined by income limits, or the area you are buying in.
There are no income limits for homes being purchased in “targeted” low to moderate income. These special programs also include discounted mortgage insurance and discounted closing costs.
Why Lenders Get it Wrong
If you’re calling from a TV, radio, or internet advertisement, you are most likely being connected to a call center, where the “Loan Officer” has little to no actual mortgage experience. You can look up the experience of your Loan Officer at http://nmlsconsumeraccess.org/ and see when they got their mortgage license and what they were doing before they became a mortgage loan officer. (YOU WILL BE SURPRISED!)
I call these “big box” lenders. These lenders are amazing at processing a certain type of loan file that does not require anything too far outside the box. They only want and really can only do the vanilla stuff.
If you are working through a big box lender, here is what is really happening, your application is not getting in front of a professional until it reaches the underwriter.
Many times, your file is not in front of the underwriter until after you’ve already accepted your purchase offer and paid for the appraisal.
Hopefully, there’s enough time, and the underwriter is experienced enough to look up the guidelines, and can figure out how to save your new home by getting you approved for the right loan.
I wouldn’t believe this happens as much as it does if I didn’t see it professional so often! So many of these horror stories we hear could have been avoided if a professional loan officer was used, and not a call center lender.
Work with an Expert
The 3% Down Alternative to FHA
It seems that a lot of people think that Conventional financing requires a minimum down payment of 20% or more.
I am shocked at how many folks I speak to every day that think that a conventional loan is not an option for buying a home with a low down payment.
Both Fannie Mae and Freddie Mac, the conventional mortgages, have special loan programs available that, based on your income, and/or the geographic region you are buying in, allows you to buy with as little as 3% down payment.
Normally Better Credit is Best
With normal conventional loan programs they tend to favor better credit scores, through their risk based pricing they punish borrowers with lower credit scores with costs to the lender that increase interest rates if you are not perfect in the eyes of Fannie or Freddie.
If you’re one of those homebuyers, or homeowners that has excellent credit to decent credit, but not a lot of equity or money for a down payment, you may be surprised at conventional loan options offer.
Fannie Mae HomeReady
Fannie Mae’s HomeReady program is designed to meet the diverse needs of today’s buyers using flexible underwriting guidelines for credit worthy low-to-moderate income borrowers trying to finance a home.
HomeReady Better Features
Income from non-borrowing household members can be considered as a compensating factor to allow debt to income ratio greater than 45%, up to 50%.
Can use income from rental unit and boarder income for qualifying.
Allows non-occupying borrowers, like a parent, to help meet debt to income requirements.
Financing up to 97% loan to value for the purchase of a one-unit principal residence.
Financing up to 95% loan to value for limited cash out refinances, or 97% loan to value if mortgage being refinanced is owned or guaranteed by Fannie Mae.
You are NOT required to be a first time home buyer to qualify for this program
Private mortgage insurance is discounted, in many cases below that of FHA and a regular conventional mortgage.
Gifts, grants, community seconds, and cash-on-hand can be used as a source of funds for down payment and closing costs.
Nontraditional credit is allowed. An example is rental history, or utility and insurance payments.
Qualifying Requirements for HomeReady
Borrowers using HomeReady are required to meet certain criteria that are not necessarily required if you’re using a traditional conventional loan with a maximum loan to value of 95% (5% down payment for purchase).
Homeownership Education Requirement – A homeownership education course may be required unless you have previously taken a course required by a community seconds program, or if you’ve completed a course from a recent attempt to purchase another home.
Income Eligibility – HomeReady is available to any homebuyer or homeowner that meets the income limits of the property location. The income limits may be waived if the property is located in a “targeted” low-to-moderate income Census Tract.
You can look up the income and property eligibility by entering the address of the home you’re interested in into Fannie Mae’s Eligibility Search Tool Here
Freddie Mac Home Possible Mortgages
Freddie Mac’s Home Possible mortgage offer low down payments for low-to-moderate income homebuyers, or buyers in high-cost or underserved communities.
Freddie Mac offers two different low down payment options, Home Possible 95% Loan to Value, and Home Possible Advantage 97% Loan to Value. I will only address the 97% or 3% down payment option.
Home Possible 97% Features
Maximum loan to value 97%. Minimum 3% down payment for purchase.
1-unit single family unit homes, condominiums, and planned unit developments are eligible.
Flexible sources of down payment. Down payment can come from a variety of sources, including friends and family, employer-assistance programs and secondary financing.
No cash-out refinancing is available up to 97% loan to value for borrowers who occupy the property.
Income flexibility. Borrowers with income above the area median income (AMI) may be eligible in high-cost areas. No income limits in underserved areas.
You can check eligibility by using Freddie Mac’s Home Possible Income & Property Eligibility Tool Here.
Private mortgage insurance is discounted, in many cases the monthly mortgage insurance is well below that of a regular conventional mortgage and below that of FHA
All borrowers must live in the property. Non-occupying borrowers not allowed at 97% loan to value.
How Do I Choose The Best Option?
There is very little to no difference between the costs and interest rates of these two programs, so it comes down to your financial situation that may determine which option is best for you. In a sense, the best option chooses you.
FHA, HomeReady, or Home Possible should all be considered for many home buyers that in the past were placed only in a FHA mortgage. What use to be has changed, if yesterday you were a FHA mortgage today you may have a better option
A common example is if you have student loans with Income Based Repayment (IBR) payments. FHA, Freddie Mac, and Fannie Mae all handle this situation differently.
Another example is that the targeted income and property lookup tools offer different results. If you look up a property using Fannie Mae’s HomeReady lookup tool, you may make too much income to qualify, whereas if you look up the same property using Freddie Mac’s Home Possible lookup tool, you may qualify. FHA does not have a maximum income limitation.
If you are considering a new home purchase and want a low down payment option you need to consider a mortgage lender that has experience with FHA, Home Possible, and HomeReady, and is willing to consider all possible options for you.
If you want to talk with me about what options are available to you please contact me, Bob Rutledge, at 314-628-2218 or email me at brutledge@usa-mortgage.com
At the start of many mortgage application I hear my borrowers tell me that they had started the process of 'fixing' their credit BEFORE they spoke with me or any other mortgage lender. This is a mistake that has hurt so many potential home buyers. This is especially true when it comes to collections on your credit report.
Collection companies have done a great job over the years of convincing consumers that paying off collections will raise their credit scores. Many are actually surprised to learn that paying off collections will actually LOWER their credit scores. Collections are usually reported on the credit as a “9” status or collection account. This means the account has already been "written off" and assigned to collections by the creditor. Once an account is reported this way on the credit report, the damage to the credit score is irreversible, unless that item is removed completely from the report. If the account is paid off, the collection company reports that the account now has a $0 balance, but they do not usually delete the item off the report. The account has already become a collection, and the risk of the consumer defaulting on another account is already very high, due to that collection. So their credit score will not go any higher if it is paid off, because paying off a collection after the fact, doesn't lower the risk of defaulting in the future. However, the DATE OF LAST ACTIVITY is updated to the date the account was paid off. So if that account was sent to collections 3 years ago, the date of last activity is 3 years old and the impact to the credit score is not as much. But if the consumer pays off that collection today, they just update the date of last activity to today's date, many times causing the scores to go DOWN as a result. Crazy isn't it?
Also, if you have medical collections most mortgage programs will not require you to remedy medical collections, in essence....we ignore them. Yes, they may be hurting your credit scores, but there are usually other methods available to you to increase your scores. Before you start doing your homework to purchase a new home please contact me or another mortgage professional. Allow us to pull your credit report for you and to discuss what is the best course of action to take, you may be surprised how easy it really is to get your credit scores higher.
You Are Not Alone
I recall the feelings that ran through me when I felt compelled to file for a Chapter 7 bankruptcy, I felt as though I was an outcast and ashamed that I could not handle my obligations. For a very long time I barely admitted it to myself much less my friends. Now I realize that I did not have a solid handle on my finances and it took a couple small set backs to put me into the position of bankruptcy. But, when I look back I see a life lesson that was provided to me and has been instilled well into the fabric of my personal life. I will not allow this to happen ever again. It is this exact lesson that Underwriters and Mortgage Lenders are looking for from borrowers when it comes to providing a mortgage approval for a home buyer after a bankruptcy.As a Mortgage Lender I am in a very unique position to provide both experience and knowledge in help my clients when they come to me for help in the purchase of a new home or the refinance of thier current house after a bankruptcy.
TIME AND PROOF
For the sake of brevity I will not get into all the exact rules for every mortgage program, I do at my website, please visit AFTER BANKRUPTCY here I provide what you need to get you approved.Every mortgage program has specific time periods that you must wait after the discharge of your bankruptcy before you get started. Though most of the programs have exceptions to those wait guidelines, for instance the wait period for FHA is normally 2 years, but there is an exception called Back to Work that allows for only a 12 month wait period.
Something that many Lenders fail on is that after a Chapter 13 bankruptcy has been discharged it is possible to be approved for a FHA mortgage after only 12 months! BUT! You can actually get approved for a FHA mortgage while you are still in the repayment period of your Chapter 13! If you have made at least 12 months of on time payments and if your Trustee agrees you are eligible for a FHA mortgage!
The Underwriters will be looking for validation that you have learned from your bankruptcy. They will want to see that if you have current credit accounts that you are making your payments on time. This is important, to re-establish credit after your bankruptcy and especially with a credit card or two.
COMPENSATING FACTORS
Applying for and getting approved a mortgage application after a Chapter 7 or Chapter 13 bankruptcy requires a stronger than normal application. To strengthen your application requires COMPENSATING FACTORS. Click on the link for a long list of items that you probably already can bring to your application, here are a couple that are important.....
Housing payment shock, you should not have a large increase in what you are paying currently for housing compared to your new house payment.
12 months of on time housing payment, this is an absolute must. There are exceptions if you are living somewhere rent free.
Keep your total debt to income ratio at or below the recommended guidelines of the mortgage program.
YOUR BANKRUPTCY FIXED A PROBLEM
When I was an Underwriter we were told that a bankruptcy should be seen as the borrower recognizing that they had a problem with thier current financial situation and the method of solving that problem was bankruptcy. Now, let's see that the borrower has learned from that life lesson and they are practicing what they learned.
It takes a mortgage lender that adhers to the guidelines of the mortgage programs and don't have overlays that create roadblocks to your approval. It takes a mortgage loan officer that is willing and able to take on your special situation, don't settle!
If you have questions please feel free to visit my website, www.bobrutledge.com or contact me.