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2018 Guide to Qualifying for a Mortgage with IBR Student Loans

When you have student loans, qualifying for a mortgage can get tricky.

UPDATED September 2018:  Watch my NEW video below about the current guidelines for buying a home with Student Loans.  Update includes NEW Freddie Mac guideline changes effective November 1st, 2018

Student loan guidelines have changed yet again.  This is your ultimate guide to understanding how these changes will affect you in 2018.

In this Article

  • Understanding IBR
  • Student Loan Payment Changes
  • Calculating Your Debt to Income Ratio
  • Student Loan Guideline Snapshot 
  • Freddie & Fannie Swap Guidelines
  • Creative Solutions to Solve Problems 
  • Why Lenders Get it Wrong

Understanding IBR

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

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When you begin to make payments on your student loans, you may have several options.

You may be making payments on your student loan based on your income.  This is called an Income Based Repayment (IBR) plan.

IBR plans typically will not cover the principal and interest due, and the loan balance may increase even though you are making payments.

If your payment is based on a calculation that pays off your loan in full at the end of a the loan term, this is an amortized payment.

All underwriting guidelines with all lenders will allow you to use an amortized payment when calculating your debt to income ratio.

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IBR plans could also leave you with a $0.00 payment, even though your loan is in repayment status.  Your income is reviewed every year to determine your new payment over the next year.

Student Loan Payment Change History

More and more students are straddled with student loan debt for years after leaving school.

Being chained to student loan debt requires an experienced locksmith to unlock the correct guidelines to get you approved for a home loan.

It’s almost a full time job keeping up with the updates to the underwriting guidelines, and IBR payments seem to send many loan officers into a tail spin of misinformation.

Student Loan Guideline Changes Since 2015

  • 2 times for Fannie Mae Conventional Loans
  • 2 times for Freddie Mac Conventional Loans
  • 1 time for FHA Insured Loans
  • 2 times for VA Guaranteed Loans
  • 1 time for USDA Guaranteed Loans

The first major change to the underwriting guidelines happened when lenders were no longer allowed to ignore deferred payments or loans in forbearance.

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The second major change was that you had to apply a payment to any student loan balance.  If the payment reporting on your credit report will not pay off the loan at the end of a fixed term, your payments are not amortized.

Non-amortized payments became public enemy #1 by Fannie Mae, FHA, and USDA.  In 2015, Freddie Mac guidelines did not allow for deferred payments or loans in forbearance, and would allow IBR payments, even if the reported payment is $0.00.

Calculating Your Debt to Income Ratio (DTI)

The entire student loan debacle is being caused by confusion around how your debt to income ratios are calculated.

Your debt to income ratio is calculated as your proposed housing payment (when buying a home) plus your monthly liabilities from your credit report, as a percentage of your gross income.

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When using a Fannie Mae or Freddie Mac Conventional loan, the total housing payment plus monthly liabilities cannot exceed 50% of your gross income, or a 50% DTI.

Borrowers using a FHA mortgage have 2 DTI ratios.  A front-end debt to income ratio is your housing payment as a percentage of your income.  A back-end debt to income ratio includes your monthly liabilities from your credit report.

FHA will allow your housing payment to be as high as 46.99% front-end DTI, and a maximum 56.99% back-end DTI including your debts.

Student loans become confusing when no payment is reported on your credit report, or when your payment is an Income Based Repayment (IBR) payment.

Speak to a Loan Officer About Your Student Loans

2018 Student Loan Guidelines Snapshot

Fannie Mae Conventional

  • Non-amortized Payment – IBR Ok, even with $0.00 payment – Updated April, 2017
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

Freddie Mac Conventional – UPDATE Effective November 1st, 2018

  • Non-amortized Payment – May use payment as reported on credit report –Effective November 1st, 2018
  • $0 payment on credit report use .5% of loan balance –Effective November 1st, 2018
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use .5% of loan balance – Effective November 1st, 2018

FHA Government Insured

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  • Non-amortized Payment – Not Allowed | Must use 1% of loan balance
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

VA Guaranteed Loan

  • Non-amortized Payment – Not Allowed | Must use 5% of loan balance divided by 12
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

USDA Guaranteed Loan

  • Non-amortized Payment -Not Allowed | Must use 1% of loan balance
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

Freddie and Fannie Swap Guidelines

Interestingly enough, Fannie Mae and Freddie Mac have since swapped positions on IBR payments as of the most recent update by Freddie Mac in February 2018.

Freddie Mac no longer allows for IBR payments, while Fannie Mae does since April 2017.  Fannie Mae will even allow an IBR payment with a $0.00 payment.

If you have an IBR payment that is equal to less than .5% of the balance of your student loan, Fannie Mae is your option option for being able to use the payment as reported on your credit report.

UPDATE EFFECTIVE November 1st, 2018

Effective for Mortgages with Settlement Dates on and after November 1, 2018. Currently, student loans that are in repayment are subject to different requirements than those that are in deferment or forbearance.

Freddie Mac has reviewed their requirements for liabilities included in the monthly debt payment-to-income ratio, specifically student loan liabilities, and have aligned requirements for student loans that are in repayment, deferment or forbearance, providing one simplified approach for the calculation of student loan debt.

Previous requirements

Use the greater of:

  • The payment amount on the credit report
  • 0.5% of the original loan balance
  • 0.5% of the current loan balance
  • If student loan is in deferment, use 1% of loan balance
  • If student loan is in forbearance, use 1% of loan balance

New Requirements – EFFECTIVE November 1st, 2018

If the monthly payment amount is greater than zero, use the monthly payment amount reported on the credit report or other file documentation, or

If the monthly payment amount reported on the credit report is zero, or if your student loan is in Deferment or Forbearance, use 0.5% of the outstanding balance.

Freddie Mac’s automated underwriting system, LPA (Loan Product Advisor) feedback messages will be updated by November 1, 2018 to reflect these changes.

Creative Solutions to Solve Student Loan Problems

If you are trying to buy a home, and the pieces just aren’t fitting together, here are some creative solutions that past clients have successfully done.

Payments Deferred or Loan in Forbearance

If you have loans with deferred payments, or if your loan is in forbearance, we have had homebuyers go into an income based repayment plan, and qualify using a Fannie Mae Conventional

Parents Co-Sign and Pay Student Loan Payment

Fannie Mae recently updated their “Contingent liability” guideline to allow student loan payments to be ignored, if you can show that a co-signer has made the payments for the past 12 months.

Debt to Income Ratio too High for Conventional

This home buyer is consolidating over a dozen loans into a 30 year amortized payment.  We needed an amortized payment to take advantage of more flexible DTI requirements over Conventional.

Payment Not Showing Up on Credit Report

If you loan is in repayment, your lender can get a credit supplement (if needed) from the credit bureau by providing them with a copy of your statement from your student loan lender.

Have Less than 5% Down Payment and IBR Payment

It is a common misunderstanding that FHA offers the lowest down payment.  VA & USDA offer 100% financing, but additional qualifying is required.

Both Fannie Mae and Freddie Mac have programs that allow for as little as a 3% down payment.  Eligibility can be determined by income limits, or the area you are buying in.

There are no income limits for homes being purchased in “targeted” low to moderate income.  These special programs also include discounted mortgage insurance and discounted closing costs.

Can Only Qualify for FHA Loan

There are many reasons why a FHA loan is the best option for you.  Conventional financing is more restrictive, requires a higher credit score, and is often not an option if you have a lot of debt on your credit report.

The solution is to document what an amortized payment would be should you start making payments on your student loan that would pay the loan off at the end of the loan term.

There is no guideline that requires that you are actually in repayment on your loan, only that you use an amortized payment for the purpose of calculating your debt to income ratio.

There are a couple of ways you can identify what this payment would be:

  • Call your student loan lender and ask them for a statement/quote showing what that payment would be.
  • Begin making payments on your student loan (you can put it back into deferment after your home loan is completed)

If you are going to consider either of these options, first discuss with an experienced mortgage loan officer whether or not you would still qualify using an amortized payment.

Your loan officer can calculate what that payment might be.  The problem you are solving for is getting documentation form the student loan lender supporting that payment.

Why Lenders Get it Wrong

If you’re calling from a TV, radio, or internet advertisement, you are most likely being connected to a call center, with little to no actual mortgage experience.

I call these “big box” lenders.  These lenders are amazing at processing a certain type of loan file that does not require anything too far outside the box.

Student loan payments are not really so far outside the box, but the timing for when these issues are found could not be worse.

If you are working through a big box lender call center, your application is not getting in front of a professional until it reaches the underwriter.

The underwriting guidelines for student loans, and specifically income based repayment plans, have changed several times over the past 2 to 3 years.

Many times, your file is not in front of the underwriter until after you’ve already accepted your purchase offer, and paid for the appraisal.

Hopefully, there’s enough time, and the underwriter is experienced enough to look up the guidelines, and can figure out how to save your new home by getting you approved for the right loan.

I wouldn’t believe this happens as much as it does if I hadn’t experienced it personally!  We first covered this topic in 2015, and have answered hundreds of IBR questions from buyers across the Country.

So many of these horror stories we hear could have been avoided if a professional loan officer was used, and not a call center lender.

Working with an Expert

We have been helping home buyers since 2015, when the major challenges we face today were first introduced.

Find My Way Home is an Expert Network of experienced mortgage professionals, here to answer your questions, and get you accurate answers.

You can get your questions answer by either Visiting our Expert Network HERE, or you can leave a comment or question below.

I answer all questions, and if needed, can introduce you to a professional, experienced loan officer that I know can help.

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • Mia says:

    Thanks for the info it is greatly needed

  • Bobby says:

    Hi Scott, I have a zero payment IBR that has to be recertified every year. Our lender states we do not qualify unless it can show that we have a payment plan for at least a 3 yr term otherwise we will be penalized the .5 to 1 %. He also noted if we show any payment then it will not be questioned which would qualify us. I am confused if that is the case then showing a payment is not the issue, it is the term length that is in question. Can you refer someone that can help us thanks.

    • Scott Schang says:

      Hi Bobby, that is not true. As long as we can show that the loan is in repayment status, and the payment is $0, an experienced loan officer can do this. Shoot me an email to scott@findmywayhome.com and let me know what State you’re in, and leave me your contact information.

      I have loan officer friends that cover all 50 States that have experience with these guidelines!

      Hope this helps?

  • Megan says:

    This video was incredibly helpful! I’m so stressed out and not sure where to start as a first time home buyer, especially with being on an IBR. I just sent you an email 🙂

    • Scott Schang says:

      Thank you Megan 🙂 I just replied to your email and introduced you to Mia Schultz. Mia is an expert at these guidelines and has a ton of experience helping folks in your situation. You should hear from her shortly!

      Hope this helps?

  • Jennifer Lipovsky says:

    i really need help. i have been IBR for 12 years always paying $0.00. My credit scores are 603 613 and 620. the house i want to purchase is a fannie mae home listed for 65k. in great condition. my debt ratio come to 49 with the 1% balance inclusion. this is killing me. I make 17.30 and hour. i have no idea how to qualify for fannie mae i am only trying to get FHA and I have to pay points or something. This is not a fun process and I need a place to live rent is way more expensive and I dont want a huge mortgage payment. I want to live way within my means. The smaller the payment the better.

    • Scott Schang says:

      Hi Jennifer, You would need a minimum credit score of 620, and then you could qualify for a Fannie Mae conventional loan. Fannie Mae conventional financing allows you to use your $0 payment. It sounds like you’re so close, I would be willing to bet that you’re “paying down one credit card” away from qualifying. I can introduce you to a lender that has experience with these guidelines if you would like? Please shoot me an email to scott@findmywayhome.com and let me know what State you’re buying in?

      I hope this helps?

  • mf says:

    But how/where do I apply for a Fannie Mae loan? Every bank is offering va, fha, conventional, and usda. They don’t mention anything about an option when your loans are IBR.

    • Scott Schang says:

      Fannie mae is a conventional loan. Unfortunately, your options are always limited to the experience of the person you’re talking to on the phone. If the loan officer does not have experience with these programs, it’s unlikely they are going to know how to have a conversation about all of your options.

      I also received your email, and have introduced you to a loan officer that I know and trust that has a lot of experience with student loan guidelines!

      Hope this helps?

  • stephanie says:

    I am loving the new update!! That’s a major change!!

  • Linda says:

    I also need to add that I have a high credit score and money down. I am on an IBR and the student loan will be forgiven as I work in public service. Thanks for listening. I too have experienced banks and credit unions who do not know the guidelines but rather it seems like they only want to do a conventional loan

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