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
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:
Application Examples – FHA Loan Guidelines For Student Loans
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:
2022 Freddie Mac Conventional Loan Guidelines For Student Loans:
* 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:
USDA Student Loan Guidelines 2022:
- 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.
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.
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.