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
Loans For Remodeling, Mortgages for Renovation or Fixing Up, Home Loans for Rehabbing, Home Improvement Loans. There are a lot of different options available to you to borrow the funds necessary to complete the project you have in mind for your home or soon to be home.
You currently own your home and want to make improvements or upgrades? You are looking at purchasing a new home and are considering a fixer upper? There are home loans and mortgages available to you!
The FHA 203k Renovation Mortgage is the best known mortgage option to help a home owner or home buyer with home remodeling and renovation funding. The FHA 203k is a first mortgage that combines the sales price and the renovation costs as a combined new first mortgage when you are purchasing a new home. If you already own your home the FHA 203k would be used as a refinancing or replacement of your current mortgage.The FHA 203k can be used to make just about any home improvement you can consider or think of. Want to add a second story to your ranch? Looking to upgrade all your appliances? Add a new room? Expand your garage? Landscaping? If you would like to learn more about the FHA 203k visit my webpage; http://www.bobrutledge.com/fha203krenovationloan
One of the great advantages of the FHA 203k is that you don't always need to have equity in your home. The FHA 203k will allow you to borrower 10% over the after completion appraised value. So if you are short on equity to start use this program to make equity building improvements and build new equity in your home.The Fannie Mae HomeStyle Renovation Mortgage, this is the near FHA 203k equal but a conventional renovation mortgage option. All the improvements that you can make with the FHA 203k you can do with the HomeStyle Renovation Mortgage. If you are considering getting a swimming pool you cannot go with the FHA 203k but you can get it done with the Fannie Mae Home Style Mortgage.
The HomeStyle mortgage can be used as a refinance or replacement of your current mortgage or it can be used as a new purchase mortgage for those homes that need some extra work to make them your home. The minimum down payment or equity position is 5% or the appraised value or sales price.
The big advantage the HomeStyle Renovation Mortgage has over the FHA 203k is mortgage insurance. If you have 20% equity in your home or a 20% down payment you will not have a monthly mortgage insurance payment. If your loan to value ends up being more than 80% but less than 95% there is a possibility of not having a monthly mortgage insurance payment, mention it if you are interested in this option.Cash Out Refinance, no matter what type of mortgage you have on your home you can refinance to get cash out of the equity you have in your home. Each mortgage, except USDA, has their loan to value limitations based on a new appraisal, FHA is 85%, VA is 100%, and Conventional is 80% loan to value based on a new appraisal in many instances.
Home Equity Second Mortgages and Loans, many times these are referred to as Home Equity Lines of Credit or Home Equity Second Mortgages. Professionally, I do not have the ability to provide any of these mortgage programs but I do have resources to help you with finding the right HELOC for you.
Many times these types of loans are shorter in term, require much more equity in the home, have higher interest rates, and are harder to qualify for. But, the times are changing and I am starting to see these programs loosen up. Talk with your bank to start, then a credit union or two, and then ask me if I can help. There are positives and negatives associated with these loans but they have a very useful purpose.
Did You Know? In many instances the FHA 203k, HomeStyle, and Cash Out Refinances have tax advantages that Home Equity Loans do not. This is especially true if you utilize the mortgage interest deductions on your Federal tax returns. Consult your tax preparer before making this decision.
There are a few more options available to you when it comes to financing your home improvements and remodeling projects. Consider asking your Contractor to finance the costs, many bigger companies can do this or provide you with a private lending company. But, look at the terms and conditions and compare with some of the options above. Ask you contractor if you can make payments during the work phase, many will take a percentage upfront, during, and at the end.
I am a Mortgage Lender with USA Mortgage and I am a Certified FHA 203k Specialist, I close either one or more FHA 203k and/or HomeStyle mortgages nearly every month. I closed my first renovation mortgage nearly 20 years ago. You need and want a mortgage loan officer like me if your are wanting a home loan for fixing up you house, remodeling, renovating, improving, or rehabbing.
USA Mortgage has offices in the St. Louis MO area, plus Kansas City MO, Columbia MO, Springfield MO, Jefferson City MO, Branson MO, and Cape Girardeau MO. I am located in the St. Louis and St. Charles MO area but help borrowers throughout the State of Missouri, if you have questions or want help please feel free to contact me.
A Jumbo Mortgage is a home loan that exceeds the maximum loan limit of either Fannie Mae or Freddie Mac. In St. Louis and Kansas City MO that maximum loan amount is $424,100.00, so if you have mortgage higher than this number it is considered a Jumbo home loan.
It has been very standard that lenders required a minimum down payment on a Jumbo mortgage of at least 20% of the sale price, over the last year or so that minimum down payment has started to shrink.
If your mortgage amount was close to the conventional loan limits it was possible to do a split loan for many borrowers, to get that borrower a lower down payment. You would have at least a 80% conventional first mortgage and then a 10% second mortgage, which would then require a 10% down payment from the borrower. These split loans are still very popular and I help many Jumbo home buyers with this type of mortgage.
There are advantages to the split loan, lower interest rate, no mortgage insurance, flexible second mortgage options, and of course a 10% down payment instead of the normal 20 percent down payment. The #1 disadvantage is that your sales price cannot drift too far from the conventional loan limit.Of late we have had the opportunity to offer low down payment Jumbo mortgages to home buyers and Jumbo home owners for refinances without having to go the split loan route. We have several 5% down payment mortgage program options available as well as 10% down payment options.Many of these low down payment Jumbo mortgage options will provide a variety of Adjustable Rate Mortgages, 3 year, 5 year, 7 year, and 10 year ARM options, as well as fixed rate options.
Debt ratios are a little more flexible with these newer jumbo programs in that they will allow for a higher debt ratio than the guidelines for a conventional mortgage. To help with those borrowers who have a difficulty with proving income there are a some added nuances to these programs that help provide income to the application. For instance there is the Asset Depletion income addition. On qualified asset accounts, retirement accounts or brokerage accounts for example, we can apply a formula to those assets and apply a specific amount as your income without you ever having to withdraw those funds from the asset account. This can help with debt to income qualification and strengthening a borrowers application.
Many of these new programs are now available not just for primary residences but also for second homes.
You can use these new programs not only for purchases but for rate and term refinances, AND cash out refinances.
If you are considering a low down payment Jumbo mortgage you need to look into some of these new programs that are now available with more coming. I would welcome the opportunity to discuss these programs with you, how they can match your situation, and the best possible options to help.
A low down payment keeps your money working for you at a higher rate of return than most homes in the area in most instances.
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.
The VA Mortgage is one if not the number one best mortgage program because of its flexibility to provide more to the veteran borrower than any other mortgage program.
The advantages of the VA mortgage; zero down payment, no private mortgage insurance, very competitive interest rates, and the VA mortgage is easier for you to qualify for than a conventional mortgage and most other mortgage programs.
You can purchase your next new home with zero down payment and for most VA borrowers they will have little to no money out of pocket on the day of closing. Working with you Bob Rutledge will help to get you your next new home with very little out of pocket expense. Last year his average VA borrower came to the closing table only needing $134.oo…… for everything!
Bob Rutledge has been a mortgage loan officer since 1996 and has helped many veterans finance their new home. Contact Bob early and have him lay out your personalized plan on how you will use the zero down payment of the program as well as lender credits and seller concessions to get you into your next new home with little to nothing out of pocket.