Fannie Mae IBR Student Loan Updates Make it Easier to Buy a Home
Fannie Mae announced today that they are removing hurdles that will help homebuyers with student loans.
Previously, only Freddie Mac allowed homebuyers with Income Based Repayment (IBR) plans to qualify with a payment that does not pay off the loan at the end of a term.
This announcement by Fannie Mae will open up more options for homebuyers using conventional financing when buying their first, or next home.
Unfortunately, FHA government insured mortgages are still sticking with the old guidelines that require a fully amortized payment.
Debt to Income Ratio
When your lender is calculating your debt to income ratio, they are considering in all of the payments from your credit report, as a percentage of your total monthly income before taxes.
This number is your debt to income ratio. The maximum debt to income ratio for conventional financing, either Fannie Mae or Freddie Mac, is usually 45%.
This means that your monthly expense, including your new mortgage payment, cannot be greater than 45% of your gross monthly income before taxes.
IBR, PAYE, REPAYE
Prior to this guideline change, Fannie Mae required you to use a payment that will pay off your student loan at the end of the term.
For homebuyers that are on IBR, PAYE, or REPAYE payment plans, your student loan payment is based off of your disposable income at the end of the month.
It is not unusual for you to have a payment of $15 to $150 a month, even if you have hundreds of thousands of dollars in student loan debt.
Homebuyers that work in the public sector in local or federal government positions, or as teachers or first responders have the ability to have their student loan debt forgiven at the end of 10 years.
All of these programs mean that you are most likely not going to pay off your student loan balances by making the minimum monthly payment using one of these programs.
The new Fannie Mae guideline has specifically been changed to allow you to use the payment that is reported on your credit report.
When Do You Have to Use 1% of the Balance?
Fannie Mae has not completely eliminated the 1% rule.
If your student loans are in deferment, or if your IBR payment is $0.00, you still have to use a calculation that will fully pay off the loan at the end of an amortized term, or 1% of the balance of the loan.
If you do not have a fully amortized payment, and if your debt to income ratio is too high using 1% of the balance of the loan, Fannie Mae offers the following calculation table that may reduce your payment.
The following table specifies the repayment period to be used when calculating a fully amortizing payment at the current prevailing rate.
Prevailing Rate Student Loan Payment Table
|Total outstanding balance of all student loans||Repayment Period|
|$1— $7,499||10 years|
|$7,500 — $9,999||12 years|
|$10,000 — $19,999||15 years|
|$20,000 —$39,999||20 years|
|$40,000 — $59,999||25 years|
|$60,000 +||30 years|
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