March 29th, 2018 9:24 AM by Bob Rutledge
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.
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