Nearly 45 million Americans have student debt. Thankfully, its becoming easier for homebuyers to obtain a mortgage with student loans. Recent updates to lending guidelines mean that you could be “hit with” a lower student loan payment when it comes to mortgage qualification.
Here’s what lenders are required to count as your student loan monthly payment as of mid-to-late 2023.
Student loans can be confusing. Between different types of loans various repayment plans and complex eligibility requirements, it’s easy to feel overwhelmed. However, income-based repayment options offered by Fannie Mae can provide an affordable way for borrowers with student loans to qualify for a mortgage. This article breaks down everything you need to know about using income-based student loan repayment plans for Fannie Mae mortgage qualification.
What is Income Based Repayment?
Income-based repayment (IBR) is a type of repayment plan for federal student loans that caps monthly payments at a percentage of your discretionary income. Your discretionary income is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and state.
With IBR, your payment is recalculated each year based on your updated income and family size. The percentage of income varies depending on when you first received student loans
- For loans first disbursed before July 1, 2014, your payment will be capped at 15% of discretionary income
- For loans first disbursed on or after July 1, 2014, your payment will be capped at 10% of discretionary income
One key benefit of IBR is that any remaining loan balance can be forgiven after 20 or 25 years of qualifying repayment depending on when you received your first loans.
How IBR Works with Fannie Mae Mortgages
Fannie Mae allows lenders to consider IBR payments when qualifying borrowers for mortgages, instead of the full amortizing payment. This makes it easier for borrowers with high student loan debts to meet debt-to-income requirements.
To use IBR for mortgage qualification with Fannie Mae, the lender must obtain:
- Documentation of the IBR monthly payment amount, and
- Proof the borrower is enrolled in the IBR plan
The lender can then use the IBR payment when calculating the debt-to-income ratio, provided the payment amount is likely to continue for at least 12 months.
One important caveat – the lender must still consider the entire student loan balance outstanding, not just the IBR payment, when evaluating borrower reserves.
Eligibility Requirements for IBR
To qualify for the income-based repayment plan on your federal student loans, you must have a partial financial hardship. This means your annual student loan payment under a 10-year standard repayment plan is higher than the IBR percentage of your discretionary income.
In addition, to use IBR for Fannie Mae mortgage qualification, your payment must be below the fully amortizing amount.
Other IBR eligibility requirements include:
- Having eligible federal student loan types
- Direct Loans, Stafford Loans, Graduate PLUS Loans, Consolidation Loans (excluding joint spousal consolidation loans)
- Providing annual income documentation
- Recertifying annually
As long as you continue to recertify each year and have a partial financial hardship, you can remain on the IBR plan.
The IBR Application Process
Applying for income-based repayment is straightforward. You’ll need to provide some personal information along with documentation of your income and eligible loans.
Follow these steps:
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Determine your discretionary income using your most recent adjusted gross income and family size.
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Collect documentation for your eligible federal student loans.
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Complete the Income-Driven Repayment Plan Request form.
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Submit the form and required documentation to your loan servicer.
Once approved, your loan servicer will place your eligible loans on the IBR plan. You’ll need to recertify each year by providing updated income and family size information.
As long as you continue to recertify, you can remain on IBR as long as you have a partial financial hardship or a balance on your loans.
The Benefits of Using IBR with Fannie Mae
Combining income-based repayment with a Fannie Mae mortgage offers several advantages for eligible student loan borrowers:
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Lower mortgage payments: IBR payments are often much lower than standard 10-year amortizing payments. This improves debt-to-income ratios.
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Mortgage affordability: Reduced student loan payments can make homeownership possible by meeting DTI requirements.
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Interest subsidies: If your IBR payment does not cover accruing interest on subsidized loans, the government pays the unpaid interest for up to 3 consecutive years.
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Loan forgiveness: Remaining loan balances are forgiven after 20 or 25 years of qualifying IBR payments.
IBR helps balance student loan affordability with mortgage qualification. By capping payments based on your income, this repayment plan can be a valuable option for student loan borrowers looking to buy a home.
Alternatives to IBR for Student Loan Borrowers
Income-based repayment is just one option for managing student loans when buying a home. Some other choices to consider include:
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Extended repayment: Extend your federal student loan repayment term up to 25 years to lower monthly payments. You must have more than $30,000 in outstanding Direct or FFEL loans.
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Graduated repayment: Start with lower payments that gradually increase every 2 years. This can provide initial payment relief.
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Paying down balances: Make extra payments to reduce loan principal and qualify for lower payments sooner.
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Refinancing: Combine multiple loans into one new private loan with lower interest rate to reduce monthly payments.
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Deferment: Temporarily postpone payments due to economic hardship or other eligible circumstances. Interest may still accrue.
Compare all repayment and deferment options to find the most strategic approach for your finances and homebuying goals.
Key Takeaways on Fannie Mae and IBR
The income-based repayment plan allows borrowers to qualify for a Fannie Mae mortgage by reducing student loan payments. Key points to remember include:
- IBR caps payments at 10-15% of discretionary income based on when loans originated
- Fannie Mae requires documentation of current IBR payment and plan enrollment
- Full student loan balance must still be counted for reserves calculation
- IBR offers loan forgiveness after 20-25 years of payments
- Alternatives like extended repayment may also help lower payments
Using income-based repayment can unlock mortgage affordability. Consult a financial advisor to map out the optimal strategy for managing student loans while pursuing homeownership.
Frequently Asked Questions
Does IBR Cover Private Student Loans?
No, only federal Direct Loans, Stafford Loans, Graduate PLUS Loans, and federal consolidation loans are eligible for income-based repayment. Private student loans do not qualify.
Can Married Borrowers Use IBR for Mortgage Qualification?
Yes, married borrowers can use IBR for mortgage qualification with Fannie Mae as long as they meet the plan requirements. The lender will include the spouse’s income and eligible loans when calculating payment amounts.
How Often Do You Have to Recertify IBR?
Borrowers must recertify income and family size annually to remain on the income-based repayment plan. You’ll need to complete and submit a new repayment plan request form each year.
Does Changing Jobs Impact IBR Payment Amounts?
Yes, since IBR payments are based on your income, any change in employment or income could potentially impact your payment amount when you recertify. Higher income usually results in a higher payment amount.
What Happens After my Loans are Forgiven Under IBR?
Once your federal student loans are forgiven after 20-25 years under IBR, they will be discharged and you will no longer have any payment obligation. However, the amount forgiven may be taxed as income, so consult a tax advisor.
Using income-based repayment can be a smart approach for managing student loans while pursuing homeownership. By providing affordable payments tied to your income, IBR helps qualified borrowers meet Fannie Mae debt-to-income requirements and achieve their dreams of owning a home.
Getting an FHA Loan With Student Loans
FHA loans are 3.5% down home mortgages insured by the Federal Housing Administration. They allow borrowers to qualify with a credit score as low as 580. With a 10% down payment, you even qualify with a credit score of 500.
The FHA process for calculating student debt obligation is much more straightforward than conventional loan standards. The guidelines apply to all outstanding student loans, regardless of payment status, and allow fewer exceptions.
Student loans currently being paid and with a payment on the credit report: Lenders may use the amount specified on your credit report. If this number is incorrect, they can accept recent student loan documentation as proof of the correct payment.
Student loans with no payment on the credit report: Lenders can use your actual amount, as per student loan documentation, if the cost exceeds $0.
Student loans in deferment: For deferred loans with a $0 monthly payment, lenders will calculate your monthly debt as 0.5% of the outstanding loan balance.
Income-based repayment: For IBR plans, lenders may use the amount stated on your credit report or loan documentation. If your IBR amount is $0, lenders will use 0.5% of your loan balance as your monthly obligation.
Payment Used for Qualification Purposes (Fannie Mae)
Student loans currently being paid and with a payment on the credit report: Lenders may use the amount specified on your credit report. If that amount is incorrect, you can submit your most recent student loan statement as proof of the correct amount.
Student loans with no payment on the credit report: Conventional lenders must determine the status of the loan, either deferment, income-based repayment, forbearance, or another status. The lender will then calculate the income according to the guidelines below.
Student loans in deferment or forbearance: Lenders may either calculate a fully-amortized payment based on your loan repayment terms or a monthly payment equal to 1% of your outstanding loan balance. Lenders are allowed to use the 1% calculation even if it’s lower than the actual fully-amortizing payment.
Income-based repayment: If your IBR payment amount is above $0, lenders may use the actual amount specified in your credit report or loan documentation. For IBR plans with no monthly payment, lenders may ignore your student loan payment during DTI calculations and use a $0 payment.