Getting A Mortgage With Student Loans In Deferment 2021

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COVID-19 UPDATE: Through executive orders and decisions, the Biden administration automatically placed federally serviced student loans into administrative forbearance until at least August 31, 2022.

Your automatic withdrawals from your bank account, if any, for payments have also been halted. Forbearance may be problematic if you have an IBR or IDR payment plan and are trying to get approved for a mortgage.

Your student loan payments may be deferred or in forbearance. If your loans are deferred, you have no payments due.

Your ability to repay your student loans may depend on your income. This is called an Income-Based Repayment (IBR) plan.

IBR plans typically do not cover the principal and interest that is owed, and even though you are making payments, the loan balance may still rise.

This is an amortized payment if your payment is determined by a formula that fully settles your loan at the end of the loan term.

You may compute your debt-to-income ratio using an amortized payment in accordance with all lending guidelines.

IBR plans could also leave you with a $0. 00 payment, even though your loan is in repayment status. Every year, a review of your income is conducted to determine your new payment for the following year.

Student Loan Payment Change History

More students are burdened with student loan debt years after graduating from college.

When you’re bound by student loan debt, you need a skilled locksmith to unlock the right criteria to get you approved for a mortgage.

Keeping up with changes to the underwriting standards is nearly a full-time job, and IBR payments appear to send many loan officers into a tailspin of confusion.

Student Loan Guideline Changes Since 2015

  • 2 times for Fannie Mae Conventional Loans
  • 3 times for Freddie Mac Conventional Loans (January 2020 most recent)
  • 3 times for FHA Insured Loans (July 2021 most recent)
  • 2 times for VA Guaranteed Loans
  • 2 time for USDA Guaranteed Loans

    • When lenders were no longer permitted to disregard deferred payments or loans in forbearance, the underwriting guidelines underwent their first significant change.

    The requirement to apply payments to any outstanding student loan balance was the second significant change. Your payments are not amortized if the payment information on your credit report will not pay off the loan at the end of a set term.

    Fannie Mae, FHA, and USDA turned non-amortized payments into the public enemy number one. In 2015, Freddie Mac regulations prohibited deferred payments and loans that were in forbearance but permitted IBR payments, even if the reported payment was zero. 00.

    Calculating Your Debt to Income Ratio (DTI)

    There is misunderstanding regarding how your debt to income ratios are calculated, which is the root of the entire student loan crisis.

    Your proposed housing payment (when purchasing a home) and your monthly obligations from your credit report, expressed as a percentage of your gross income, together determine your debt to income ratio.

    A Fannie Mae or Freddie Mac conventional loan’s total housing payment plus monthly obligations cannot be more than 50% of your gross income, also known as a 50% debt-to-income ratio (DTI).

    Borrowers using an FHA mortgage have 2 DTI ratios. Your housing payment expressed as a percentage of your income is known as a front-end debt to income ratio. Your monthly obligations from your credit report are included in a back-end debt to income ratio.

    Your housing payment may be as high as 46 according to FHA. 99% front-end DTI, and a maximum 56. 99% back-end DTI including your debts.

    When there is no payment on your credit report or when you are making an Income-Based Repayment (IBR) payment, student loans can be confusing.

    Video: How to Qualify for a Mortgage with Student Loans

    To determine how much student loan debt repayment should be included in the calculations to qualify for an FHA mortgage loan, the FHA now mandates that one of the following criteria be used:

  • The amount that appears on the student’s credit report (if it is above $0)
  • The actual payment amount that appears on the student loan documentation
  • If the credit report shows $0, the lender can use 0.5% of the loan balance as the required payment (this was reduced from 1% in June of 2021)
  • If you are on a repayment plan that allows for payments lower than appear in your credit report (for example, you are on an IBR or other payment program that allows for lower payments than your original loan documentation) the lender can ask for documentation from your student loan servicer. Once that amount is confirmed, they can use that lower number, as long as it is not $0. If the IBR payment is $0, the lender will use 0.5% of the loan.
  • The lender can exclude student loan payments entirely if you can provide written documentation from the student loan servicing company that the loan balance has been forgiven, discharged, canceled, or otherwise paid in full.

    • Application Examples – FHA Loan Guidelines For Student Loans

  • Payment Is Listed On Credit Report: Jacob owes $150,000 on his student loan. His credit report shows his monthly payment as $200. The lender will use the $200 documented number
  • Payment Is Not Listed On Credit Report, Or It Is Listed As $0 On The Credit Report: Hailey’s balance on her student loans is $100,000, but her credit report shows $0 as her monthly payment. The lender will use 0.5% of the $100,000 remaining balance as the required payment amount ($100,000 * .005 = $500)
  • Loan Is In Deferment Or In IBR Status: Skylie owes $200,000 on her student loan, but her payments are currently in deferment because she is part of the IBR program, and her income-based payment is currently $100 per month. The loan officer will use 0.5% of $200,000 = $1000 unless Skylie can show written confirmation from her loan servicer that her current payment is $100. As long as her IBR payment is greater than $0, they can use that amount. If the IBR payment is $0, then they will use 0.5% of her income for mortgage qualification.

    • Conventional Loan Guidelines 2022: Student Loans

    Conventional loans (loans not covered by government guarantees through initiatives like the FHA, USDA, or VA) typically follow either Fannie Mae’s or Freddie Mac’s rules.

    2022 Fannie Mae Conventional Loan Guidelines For Student Loans:

  • If the student loan payment is shown on the credit report, they use that amount
  • If the student loan payment is not shown on the credit report, or if it appears as $0 on the credit report, they use the amount shown on the student loan documentation (the most recent student loan statement is acceptable)
  • If the student is on an IBR (income-based repayment) plan, that amount will show up on the most recent student loan statement and that amount should be used. If the monthly payment shows on that statement as $0, they can use $0
  • If the loan is deferred or in forbearance, the lender should use 1% of the outstanding loan balance or calculate a payment rate based on the student loan documentation showing repayment terms.

    • 2022 Freddie Mac Conventional Loan Guidelines For Student Loans:

  • If the student loan payment is shown on the credit report or other student loan documentation is greater than $0, they use that amount
  • If the student loan payment on their credit report is $0, they use 0.5% of the outstanding loan balance (as shown on the credit report)
  • If the student has 10 or fewer monthly payments left until the full balance of their loan is paid off, forgiven, cancelled, discharged, or in case of an employment contingent repayment program – paid off, the lender can use $0 as the monthly payment required*
  • If the loan is deferred or is in forbearance and the loan will be forgiven, cancelled discharged or considered paid at the end of the deferrmant or forbearance period, the lender can use $0*

    • * unless the lender knows of any circumstances that would prevent the student from being eligible for those programs. The employer or the student loan servicer must provide proof of eligibility.

    VA Student Loan Guidelines 2022:

  • If the student loan will be in deferment for at least 12 months after the mortgage is secured, they can use $0
  • If the student loan repayment amount is shown on the credit report, they use that number
  • When no payment amount is reported or available, the lender will use 5% of the current balance divided by 12 to determine the payment
  • If the student is in an IBR program, and their payments under that program are fixed for at least 12 months, they can use that amount. (It’s difficult to qualify for this because IBR payments are reevaluated every year, so you would need to get your loan at the same time as your IBR evaluation to qualify using this standard.) If the IBR payments are not fixed for the next 12 months, they will use 5% of the current balance divided by 12

    • USDA Student Loan Guidelines 2022:

  • If the loan is fixed – payments are consistent, the interest rate is consistent and the repayment term is fixed, the lender will use that repayment amount
  • If the loan is not fixed – it is adjustable, deferred, income based repayment (IBR), graduated or income contingent (IC), the lender will use one of the following:
    • When there is no payment, the lender will use zero. As the loan payment amount, use 5% of the loan balance as determined by the credit report or loan documentation.
    • When calculating the approved repayment amount when the payment exceeds zero dollars, the lender will refer to the loan documentation.
  • If the loan is in a forgiveness plan, the lender will use the applicable documented payment until the loan is released as a liability
  • If the loan is in the name of the student but being paid by someone else, it remains a legal obligation of the student, so payments must be included in the monthly payment amount even if they aren’t making those payments.

    • Why Lenders Get it Wrong

    You are most likely to reach a call center with little to no actual mortgage experience if you call from a TV, radio, or online advertisement.

    I call these “big box” lenders. These lenders are fantastic at handling a particular kind of loan file that doesn’t call for anything too outlandish.

    Student loan payments are not particularly out of the ordinary, but the timing of these problems’ discovery could not be worse.

    Your application won’t be seen by a professional until it reaches the underwriter if you are using a big box lender call center.

    Over the past two to three years, there have been numerous changes to the student loan underwriting criteria, particularly for income-based repayment plans.

    Frequently, the underwriter doesn’t see your file until after you’ve accepted a purchase offer and paid for the appraisal.

    Hopefully, there is enough time and the underwriter is knowledgeable enough to research the regulations and determine how to save your new home by approving you for the appropriate loan.

    If I hadn’t personally experienced it, I wouldn’t believe this occurs as frequently as it does. We first discussed this subject in 2015 and have responded to hundreds of IBR inquiries from buyers across the country.

    If a qualified loan officer had been employed rather than a call center lender, so many of the horror stories we hear could have been prevented.

    Have Questions About Qualifying for a Mortgage with Student Loans?

    You can ask a question here, and we’ll put you in touch with a local mortgage expert who can help, or you can look for a local mortgage expert near you below this article.

    FAQ

    Can you get a mortgage with student loans in deferment?

    Difficult, maybe, but not impossible. Today, there are built-in provisions in all mortgage programs for applicants with deferred student loans as well as loans that are currently being repaid. Recent and not-so-recent graduates with student debt can adhere to a set of guidelines to increase their likelihood of being approved for a mortgage at a low interest rate.

    Are student loans being deferred in 2021?

    Student Loan Payment Pause Extended Through Dec. Payment pause includes a 0% interest rate, suspension of loan payments, and cessation of loan default collection efforts.

    Can I get a FHA loan with student loans in deferment?

    If you can demonstrate that you are paying less than what is listed on your credit report, FHA will use the lower payment amount to determine your eligibility. FHA will estimate a monthly payment of zero if your loan is in deferment or your credit report indicates that you have never made a payment. 5% of your outstanding student loan balance.

    Do banks look at student loans when applying for a mortgage?

    Your ability to obtain a mortgage may be hampered, but not impossible, by student loan debt. Student loan debt is taken into account by lenders when calculating your total debt to income (DTI) ratio, which is a crucial determinant of your ability to make future mortgage payments.

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