Buyers with student loan debt frequently receive the following response from mortgage lenders: “Sorry, but your debt to income ratio is too high for a mortgage loan when using 1% of your outstanding student loan debt as a payment.” Regrettably, the FHA mandates that lenders use 1% of the balance or the fully amortized payment for mortgage qualification even though a buyer may have a low income-based repayment student loan payment. This may be a significant barrier to becoming eligible to purchase a home. Buyers now have some fantastic options for home purchase loans thanks to the new Freddie Mac student loan guidelines!
Student Loan Debt Issues
Early 2018, the U. S. crossed a student loan debt milestone in the worst way. The Federal Reserve reported $1. That amount of student loan debt, $5 trillion, is simply impossible to fathom. However, it’s more commonplace these days to have student loan debt of $50,000, $100,000, or even more. These borrowers are completely aware of these figures, and when it comes to purchasing a home
If you calculate a 1% payment on your estimated student loan debt of $100,000, that equals a $1,000 qualifying payment. By the way, that is the student loan qualifying payment. It takes a healthy income to qualify in situations like these, which hurts buyer chances because we still have to factor in the new house payment and other debts. This is especially true for first-time home buyers, who are frequently in their career’s low-income stage.
Income Based Repayment Student Loans
Fortunately, the student loan companies provide very flexible payment options for many borrowers of student loans. Deferment, graduated payments, long-term loans, and income-based repayment (IBR) are some of these. Each scenario is handled slightly differently by different mortgage programs. Plus, each mortgage loan program has its own benefits. Based on the borrower’s income level, income-based repayment student loans frequently offer a significantly reduced payment. The required monthly payment may even be zero dollars. Unbelievably, it happens frequently for someone to owe $50,000 with an IBR payment range of $0 to $50 per month.
Thus, it is clear that student loan programs have become more inventive with their payment methods. Borrowers, many of whom are starting new careers, can afford them thanks to the low payments. Mortgage programs are gradually becoming more tolerant of student loans with income-based repayment.
Fortunately, there are some new, affordable options for these circumstances that allow for low down payments and are flexible with debt ratios. Guidelines for Freddie Mac student loans now compare favorably with those of other lending institutions like the FHA or Fannie Mae.
Freddie Mac Student Loan Guidelines
Federal Home Loan Mortgage Corporation, or Freddie Mac, is a government-sponsored organization that provides a secondary market for lenders to offer borrowers affordable home loans. Offering Freddie Mac’s excellent products is something we at OVM Financial are proud to do, but we don’t stop there. We also believe in educating borrowers. Homebuyers should be aware of what they are purchasing and make an educated choice. Continue reading our blog posts written specifically for you to learn more.
As we discussed many are on income-based repayment programs. Keep in mind that these payment schedules have much lower payment levels. Buyers want to be as close to meeting these lower requirements as they can because it will be simpler to purchase a home with lower debt payments and a lower qualifying debt to income ratio. In other words, easier buyer qualification.
New Freddie Mac Student Loan Guidelines
OR
Did you notice the sweet spot here? Purchasers who make monthly student loan payments of $1 or more benefit the most. If the reported payment is $0, even if IBR, only $1 is deducted from the buyer’s debt to income ratio for a $100,000 balance with a $1 payment! 5% must be used. We must include $500 in the debt ratio for a $100,000 loan with the same required payment of zero dollars. $100,000 x . 5% = $500.
Freddie Mac Student Loan Guidelines -Deferred Student Loans
Student loans offer deferment periods for various reasons. Deferment means no payment is due. Using our 2nd guideline above, this also means using the . 5%. It is much better than using 1%, even though it is not nearly as advantageous as using the IBR or another payment above $0 Remember that 1% of the outstanding balance is the FHA student loan maximum. Using a balance of $100,000 in student loans, FHA equals $1,000 and Freddie Mac equals $500. Option 1 obviously goes a lot further in terms of qualifying for a home loan, but even an extra $500 per month helps!
Freddie Mac Low Down Payment Options
You might be thinking, “Now that my debt ratio will be lower, I can still not afford a 20% down payment.” ”. That is a common misconception, and conforming loans offer down payments as low as 3%. Additionally, a gift or even a loan could be used as the down payment!
Freddie Mac Home Possible Benefits
Home Possible is an affordable lending product offering the combination of flexible guidelines and lower mortgage insurance premiums. This equals potentially lower monthly payments and down payment along with the ability to qualify easier. Primary benefits include:
The majority of the aforementioned have clear advantages like lower credit scores and fixed rates. However, what does lower mortgage insurance mean? For the most part, mortgage insurance is required for loans with less than 20% equity or down payment. In the event of a loss due to foreclosure, mortgage insurance or PMI (private mortgage insurance) protects the lender. Yet, because it permits a down payment of less than 20%, it is advantageous to the borrower.
How Mortgage Insurance Works
On conventional loans with low down payments, there is a schedule of mortgage insurance. In general, it is the cost with the smallest down payment. The PMI percentage then declines as the down payment rises at 5% intervals. Therefore, 15% down is less than 5% down in terms of PMI. Home Possible accepts down payments as low as 3%, and its mortgage insurance premium is lower than the 5% alternative. I am aware that we previously stated that the PMI increases with a lower down payment. This program’s value is in allowing a lower down payment and then providing a reduction in the amount of mortgage insurance.
Check out our Home Possible article to learn more about the income requirements, property eligibility, and down payment sources.
To learn about methods for buying a home despite having student loan debt, get in touch with an OVM Financial loan expert. Freddie Mac student loan regulations are covered here, but we will also look at some other options. For instance, in some cases, the requirements for Fannie Mae student loans provide borrowers with even better options. Veterans also have excellent options thanks to obscure VA loan regulations. So, let’s talk!.
FAQ
What percentage does Freddie Mac use for student loans?
Freddie Mac mandates that the lender use 0 if the credit report shows a zero payment on the student loans. 5% of the outstanding loan balance. For instance, if a borrower owes $24,729 in student loan debt, you would multiply that amount by zero. 5% = $123. 65.
Does Freddie Mac do student loans?
Freddie Mac Student Loan Guidelines 2022 Like other mortgage buyers, Freddie Mac has particular specifications for the loans they’ll buy, including advice on how student loans should be taken into account during the mortgage approval process.
Does Freddie Mac allow 5 for student loans?
Freddie Mac Student Loan Guidelines -Deferred Student Loans 5%. It is much better than using 1%, even though it is not nearly as advantageous as using the IBR or another payment above $0 Remember that 1% of the outstanding balance is the FHA student loan maximum.
How does Fannie Mae calculate student loan payments?
- 1% of the outstanding balance.
- The actual payment listed on the credit report.
- a calculated payment based on the specified loan repayment terms that will completely amortize the loan(s).