Qualifying for a Mortgage with Income Based Repayment (IBR) Student Loans

by on 3.16.16 in Qualifying

UPDATED March, 2017

Student loans and mortgage qualifying are indeed a hot topic. Since first posting this article in March 2016 both FHA and Fannie Mae have made significant changes to their treatment of Income Based Repayment student loans.

Some of the changes will help those with IBR student loans while others most certainly will not.

There are questions and answers in the comments section of this article ever day.  This information is always kept up to date, and will always have the most current guidelines.

Feel free to ask your questions below, or reach out to us directly if you have specific questions, or would like an introduction to a lender that has experience with these guidelines and can help.

As more Millennial’s are looking to buy their first home, many are faced with the challenge of student loan debt and how lenders calculate payments when determining debt to income ratios. Unlike other types of debt that include monthly payments of principal and interest, student loans often have reduced or deferred payments that do not include principal repayment.

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Specifically, Income Based Repayment (IBR) plans limit your federal student loan payments to a percentage of your income. These plans can go a long way towards making payments manageable for young professionals just entering the workforce at entry level salaries. For those with very low income, payments can be as little as $0.

This is where things get interesting for mortgage lenders seeking to make sound underwriting decisions. Should they calculate debt to income ratios using the payment set under the IBR plan? Or, since the payments must eventually rise if the loan is ever to be paid off, should they use some type of proxy for a fully amortizing payment?

The answer depends on the type of mortgage you are applying for. Since the vast majority of borrowers with student loan debt aren’t looking at Jumbo loans, we’re going to focus on the different ways Fannie Mae, Freddie Mac, FHA, VA and USDA answer this question.

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If you love details, you can read the entire guideline in italics. If you like to get right to the point, skip to the BOTTOM LINE in bold.

IBR Using a Conventional Fannie Mae Loan

For all student loans, whether deferred, in forbearance, or in repayment (not deferred), the lender must include a monthly payment in the borrowers recurring monthly debt obligation when qualifying the borrower.

The lender must use one of the options below to determine the repayment amount:

  • 1% of the outstanding balance;
  • the actual payment that will fully amortize the loan(s) as documented in the credit report, by the student loan lender, or in documentation supplied by the borrower:
  • a calculated payment that will fully amortize the loan(s) based on the documented loan repayment terms: or
  • if the repayment terms are unknown, a calculated payment that will fully amortize the loan(s) based on the current prevailing student loan interest rate and the allowable repayment period shown in the table below.

The ‘current prevailing student loan interest rate’ can be found on a variety of websites. For example. see U.S. Department of Education Federal Student Aid in E-1-03. List of Contacts.
The following table specifies the repayment period to be used when calculating a fully amortizing payment.

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Calculating a Student Loan Repayment

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

Note: The lender is responsible for determining that the payment on the credit report or other documents provided by the student loan lender or borrower are fully amortizing payments.
Example: Calculating an Amortizing

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Payment Balance: $17.500
Repayment period: 15 years
Interest rate: 4.29%
Monthly Amortizing Payment: $132.00

BOTTOM LINE:  Use the actual amortizing payment. If you are unable to document the actual amortizing payment, use the calculated payment using the method above as it will nearly ALWAYS be less than 1% of the balance. If ALL ELSE FAILS, use 1% of the outstanding balance.

IBR Using a Conventional Freddie Mac Loan

When a monthly payment on an installment debt is not reported on the credit report or is listed as deferred, the Seller must obtain documentation verifying the monthly payment amount included in the monthly debt payment-to-income ratio. If no monthly payment is reported on a student loan that is deferred or is in forbearance, and there is no documentation in the Mortgage file indicating the proposed monthly payment amount (e.g., the loan verification letter), 1% of the outstanding balance will be considered to be the monthly amount for qualifying purposes.

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Examples of documentation of the required payment amount include:

  • A direct verification obtained from the creditor
  • A copy of the installment loan agreement obtained from the Borrower, or
  • If payments are currently deferred, the payment amount that will be required once the deferment or forbearance period has ended, as stated in a copy of a financial institution’s student loan certification or the installment loan agreement

While the Freddie Mac seller guide has not changed since the publishing of this article, we have spoken directly to Freddie Mac and received confirmation that they will in fact use the IBR payment when calculating debt to income ratios.

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BOTTOM LINE:  Use the documented IBR payment as long as it is greater than zero. For any loans with no payment, including IBR loans, the lender must fall back to the forbearance guidelines and use 1% of the outstanding balance unless you are able to provide documentation verifying the proposed monthly payments will be less than 1%.

IBR Using a Government FHA Loan

FHA 4000.1 Section II. A. 4. B. (H)

(4)  Calculation of Monthly Obligation

Regardless of the payment status, the Mortgagee must use either:

  • the greater of:
  • 1 percent of the outstanding balance on the loan; or
  • the monthly payment reported on the Borrower’s credit report; or
  • the actual documented payment, provided the payment will fully amortize the loan over its term.

BOTTOM LINE:  Unless you are able to provide documentation from your lender showing the actual payment that would amortize your loan in full over a fixed loan term is less than 1% of the balance, the lender will use 1% of your outstanding loan balance as the payment.

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IBR Using a Government VA Loan

Student Loans (1/4/2016)

  • Deferred Student Loans: Student loans that will be in repayment within 12 months of closing must be considered in the ratios in qualifying. Documentation of the monthly payment must be provided. If documentation is provided supporting the debt will be deferred more than 12 months after closing, the debt may be omitted from the ratios in qualifying.
  • Student loans in Repayment:

Standard Repayment Plan: The required monthly payment is to be used for qualification purposes.

Income Based Repayment Plan: Use the current payment as shown on the income based repayment agreement, or credit report for qualification purposes.

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Graduated Repayment Plan-Graduated Payments: Use the payment that will be in effect three (3) years from the Note Date for qualification purposes.

If a monthly payment is not reflected on the credit report or there is need for the payment amount required for qualification purposes, documentation, as evidenced by a letter from creditor or repayment schedule, is required to verify monthly payment.

BOTTOM LINE: Use the required payment under the income based repayment plan!

IBR Using a Government USDA Loan

If the borrower has a student loan with an income based repayment, you must use 1% of the balance. Below you will find the guideline directly from the USDA underwriting manual:

Student loans. Lenders must include the greater of

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  • One percent of the outstanding loan balance. OR
  • The fixed payment as reflected on the credit report.

Income Based Repayment (IBR) plans; graduated plans, adjustable rates, interest only and deferred plans are examples of repayment plans that are subject to change and do not represent a fixed payment or repayment plan. These types of repayment plans are unacceptable to represent a long term fixed payment repayment plan.

WHAT DOES IT ALL MEAN?

VA and USDA loans are both limited. Unless you are a veteran or buying in a “rural” area as defined by the USDA, these loans aren’t an option. If they are, the good news is both have straightforward, borrower friendly treatment of IBR plans.

For most people, the question will come down to which programs you qualify for and then which offers the most favorable income based repayment calculation. If you need to use FHA due to lower credit scores or higher debt to income ratios, things just got a lot tougher.

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After offering guidance earlier this year allowing the use of IBR payments, the current guidelines require documentation of the actual amortizing payment or 1% of the outstanding balance will be used. In either case, the payment used for qualifying will be higher than the current IBR payment. If your loan balance is relatively large, this treatment will likely erase much, if not all, of the benefit of FHA’s higher debt to income ratios.

If you are able to qualify using Fannie Mae or Freddie Mac programs, you have a good bit more flexibility. In most cases, a borrower that can be approved through Fannie Mae’s automated underwriting system (AUS) will also be approved through Freddie Mac’s AUS. This is great news if you have an IBR payment that is greater than zero. Freddie will use the IBR payment reported on the credit report so you should be home free.

If you are working with a lender that ONLY offers loans underwritten to Fannie Mae guidelines OR you have an IBR payment of $0, Fannie has an option that will not be as bad as using 1% of the balance.

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Let’s look at an actual scenario for a borrower I’m working with right now.

She’s looking to buy a home for $350,000. Her income is just over $72,000 per year. She just went through the annual review on her IBR plan and for the next 12 months she pays $146 a month on roughly $117,000 of student loan debt. If you’ve been paying attention up to this point, you see where this is going.

Since she has good credit and her debt to income ratios are under 45% using the IBR payment, we’re in luck. We can use Freddie Mac guidelines and pull the $146/month from the credit report and she’s good to go.

WHAT IF, her IBR payment had been set at zero? In that case, we could look at going FHA. Under current guidelines we simply use 1% of the $117,000 loan balance as the monthly payment. The bad news is this pushes us over the maximum FHA debt to income ratio of 56.9%. That doesn’t work so let’s move on to Fannie Mae.

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Assuming her lender would not give us documentation of a fully amortizing payment AND her loan documentation doesn’t provide enough information for us to calculate the amortizing payment, we have to use the calculated method using the ‘current prevailing student loan interest rate’.

Using the chart above we see that we use a 30 year term and the current prevailing interest rate is 4.29%. That leaves us with a monthly payment of $578. Even though the calculated payment is much higher than the actual IBR payment, we can keep the debt to income ratio just under the maximum 45% and approve the loan.

The bottom line is, “it’s complicated.” But there are options and if you’re working with an experienced loan officer who understands the intricacies of student loan qualifying guidelines, there should be an option for you. As always, we’re here to help. If you have any questions, or specific scenarios reach out directly or in the comments section below.

148 Comments
  1. I guess I’m in the same boat. Although if I understand Fannie Mae, they don’t have to go by the “greater of”, but can go by the fully amortized payment, which I could still do and keep under 45%DTI. 1% of loan would put me way over. But I can’t find a lender that seems to understand. I’m not sure about Freddie Mac, as I have a bankruptcy (no home) discharged 3.5 years ago. It seems that I have to wait 4 years post discharge for Freddie? Do you know anyone in Indiana that might help me?

    comment by Don
    on 3.27.17 at 8.17 pm
  2. Like many on this thread, my DTI is too high when calculating for 1% of my student debt. My loans are in deferment currently though I could change that to a low IBR monthly payment ($10-50). Is Freddie Mae and FHA working with IBR plans? I just talked to my montage broker this morning and was told they are not. I’d like to buy in Kitsap County, WA. Thanks for any advice .

    comment by Jeffrey
    on 3.27.17 at 11.53 am
    1. Hi Jeffrey,

      I am going to make an introduction for you to a lender friend of mine in WA that has experience with these guidelines.

      FHA will not allow your IBR payment, but Freddie Mac will as long as your loans are not currently in deferment.

      You will see the introduction shortly, hope this helps?

      comment by Scott Schang
      on 3.27.17 at 12.27 pm
  3. Hi,

    I recently did a prequalification and my car note plus IBR with 0$ monthly payment is preventing me from getting approved. Because of 1% that she had to add to my DTI and my car note being 390 puts me over 40% DTI. Any lenders in Illinois that specializes in this area to work around this.

    comment by Natosha Smith
    on 3.27.17 at 10.13 am
    1. Hi Natosha,

      Yes, there is a way around this. There are not many lenders that will allow a $0 payment. We have had success in the past going back to your lender and resubmitting your documentation to show any payment at all, even if it’s $10 a month.

      Also, you are allowed up to a 45% debt to income ratio, so there should be a little more room in there for you to qualify.

      I have a very experienced lender friend in IL. Give me a couple of minutes and I will make an introduction through email.

      comment by Scott Schang
      on 3.27.17 at 10.18 am
  4. Hello, i too fall in this category. Do you know of any lenders in the central Florida (Lake Mary/Deltona) area that woulr use the IBR payment instead of the debt to crefit ratio?I am having the hardest time sinve everyone wants to use the 1% but that puts me over the threshold for debt to income ratio. Thanks in afvance!

    comment by Lauren Davis
    on 3.26.17 at 11.20 am
    1. Hi Luaren,

      Yes, I have a great lender with a lot of experience using the IBR payment when qualifying for a home loan. I will make an email introduction now!

      comment by Scott Schang
      on 3.26.17 at 12.42 pm
  5. Hello, I am currently in deferment for my student loans. 1% of the value of the student loans is much more than what my IBR payment will be. The 1% will probably make my DTI too high but the IBR payment should not. For a home loan through Freddie Mac could I come out of deferment and set up IBR payments long enough to qualify for a mortgage under the DTI rules and then later decide whether or not to go back into deferment. Any insight you can give is much appreciated. Thanks.

    comment by Robert Kearly
    on 3.26.17 at 10.26 am
    1. Hi Robert,

      Yes, you’ll need to be out of deferment, and you would be able to use Freddie Mac guidelines, and use your IBR payment when calculating your debt to income ratios.

      What State are you planning on buying in? I would be happy to introduce you to a lender that has experience with these guidelines if you would like?

      comment by Scott Schang
      on 3.26.17 at 12.41 pm
  6. Correction: Rock Hill, SC or Charlotte, NC

    comment by Samuel
    on 3.25.17 at 9.53 pm
  7. Omg..I just experienced this last week and had no idea so many were in the situation until I started doing research on the IBR. Do you have a contact in Rochester Hill, SC or Charlotte, NC to can connect me with?

    comment by Samuel
    on 3.25.17 at 9.52 pm
    1. Hi Samuel, Yes! I have some great lender friends in those States that have experience with these guidelines. Sending email now.

      comment by Scott Schang
      on 3.25.17 at 10.08 pm
  8. My lender said that currently Student with IBR payments are currently in the “Closed” status. This keeps changing and is currently on Trumps “to-do” list to switch back to allowing the IBR payment that shows on your credit rather than the 1%. But I see you’re telling people they can do that now. I’m currently finishing my construction loan. My lender assured me that when construction finished that I could roll it into a Conventional loan and take my Step-father off of the loan as a co-signer. I have great credit and a steady job but my loans are killing me. Now I’m stuck when I’m done building rolling into a 7/1 arm loan keeping my step-dad on it until Trump gets the Bill to change, AGAIN!

    comment by Susan Ball
    on 3.23.17 at 8.33 am
    1. Hi Susan,

      Wow. I’m almost speechless. It is shocking to me that a lender would just make something up like that. There is absolutely no truth to that whatsoever, and I truly wish that there were consequences for people that would say something so ignorant. Could you imagine if your Doctor was that careless in how they diagnose a health concern? This is a financial concern, so for me, it’s almost as serious.

      Anyhow, I digress…still shocked…but back on track. As long as your student loan is not currently in a deferred status, your IBR payment can be used.

      Shoot me an email to [email protected], let me know what State you’re in, and I will introduce you to a lender that is an actual experienced professional and does not make stuff up to cover their own ignorance.

      Hope this helps?

      comment by Scott Schang
      on 3.23.17 at 9.51 am
  9. It looks like I am in the same boat as all! Do you have any contacts for a lender of broker in Atlanta, GA?

    comment by A. Scott
    on 3.22.17 at 4.53 am
    1. Yes I do, I also received your question through the chat box and introduced you to a very experienced lender that can help!

      comment by Scott Schang
      on 3.22.17 at 8.51 am
      1. Hi Scott,

        I can provide you more accurate info in a private email but here is my situation to give you an idea.

        I am a public school teacher in Illinois since 2009 and I love my job. I am also a single father. I have six figures in student loans. I’m on IBR now but I am going to be enrolling in the Federal Student Loan Forgiveness offered through the National Educators Association. In 6 six years a portion of my loans will be forgiven tax-free. And after 10 years all of them will be forgiven tax-free.

        A lender turned me down because I am not making at least $3000 in monthly payments on my student loans.

        Isn’t there a way to take into consideration my monthly IBR payments and the fact that my loans are going to be forgiven 6 and 10 years from now?

        I’m not looking for a huge house or a $200,000 home. There are actually a couple HUD homes hear that with a little work would be beautiful. There have also been move in ready homes in my area listed for $125000 or less.

        Is it impossible for me to get a mortgage or home loan now? Or am I going to have to wait 6 or 10 years?

        I look forward to talking with you, please feel free to contact me via email.

        Thank you, G.

        comment by Gary
        on 3.23.17 at 7.11 pm
        1. comment by Josh Lewis
          on 3.23.17 at 7.43 pm
  10. Do you know any lenders that will use the actual IBR payment for the debt to income ratio? I’m in Southern California. I am currently in escrow, with the deal to cancel on Friday if I don’t get loan approval. Thank you for your help!

    comment by Caroline
    on 3.21.17 at 9.21 am
    1. Hi Caroline,

      Yes, I am a lender in Southern California and we do a lot of these types of loans! I am sending you an email right now. We can save this escrow.

      comment by Scott Schang
      on 3.21.17 at 9.56 am
  11. Hello do you know any lenders that use the IBR payment for debt to income ratio? I’m looking to purchase a home in the Pleasant Run area which is a suburb of Cincinnati, Ohio?

    comment by Gloria Ridley
    on 3.20.17 at 5.23 pm
    1. Hi Gloria,

      Yes, I am sending an introduction now!

      comment by Scott Schang
      on 3.20.17 at 6.17 pm
  12. Do you know any lenders that will use the actual IBR payment for the debt to income ratio? I’m looking in the Dallas, Fort Worth (Texas) area.

    comment by Markesha Thomas
    on 3.20.17 at 12.01 pm
    1. Hi Markesha,

      Yes, we do. I have your email address, I’ll send you an introduction to a lender friend that has a lot of experience with these guidelines. As long as the loan is not currently in a deferred status, you can use your IBR payment as it is reported on your credit report, or on a statement from the student loan lender stating that the loan is in repayment.

      Hope this helps?

      comment by Scott Schang
      on 3.20.17 at 12.09 pm
  13. Hello,
    Thank you for this article. Many seem to be in the same situation as me and my husband. We have yet to find a lender that will use my IBR rather than the 1% of my student loan debt. Using the 1% puts us over the DTI threshold. We have assets, credit scores in the 750’s, and are having a hard time getting a mortgage.

    comment by Janelle
    on 3.17.17 at 6.06 pm
    1. Hi Janelle,

      I believe you just sent me an email as well? I sent you an introduction to a lender friend in PA that has experience with these guidelines and can help. Trust me, it’s not me, it’s the lenders that you’re talking to that don’t know the guidelines.

      Hope this helps?

      comment by Scott Schang
      on 3.17.17 at 6.24 pm
  14. Hi, I too have high student loan debt around 150K. I have heard that it’s possible to get a loan through a conventional Freddie Mac loan but can’t find anyone in Florida to help me. Do you know of anyone. Thanks

    comment by Marsha
    on 3.11.17 at 3.07 am
    1. comment by Scott Schang
      on 3.11.17 at 9.54 am
      1. Hi Scott,
        I live in Michigan. Please connect me with a lender that will use our actual IBR payment to qualify for a mortgage here.
        Thank you!

        Jamie

        comment by Jamie
        on 3.27.17 at 10.37 am
        1. Hi Jamie,

          I have a very experienced lender friend in Michigan that can help. Just sent you an introduction!

          Hope this helps?

          comment by Scott Schang
          on 3.27.17 at 11.35 am
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