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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 July 2018:  Watch my in depth video about the current guidelines for buying a home with Student Loans.  Updates include expanded solutions for getting around 1% rule with FHA loan.

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 – Updated July 2018
  • 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

  • Non-amortized Payment – Must use .5% of loan balance – Updated February, 2018
  • Amortized Payment – Ok with all lenders
  • Deferred or forbearance use 1% of loan balance.

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.

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

  • Yannie says:

    Hi Scott, I am on IBR plan of 65k but need to get a stated income loan due to self employed. How will lenders calculate my payment?

    • Scott Schang says:

      Hi Yannie, I would be surprised if you’re able to find a “stated” income loan. Most likely you will need to show income through bank statements. Any lender willing to offer one of these reduced documentation, or alternative documentation loans is going to make their own underwriting rules. Because you cannot sell this type of loan to Fannie Mae, they do not have to follow Fannie Mae guidelines. I would just be very up front about the student loan and lead with that question.

      Also, have you spoken to a professional loan officer yet? Have you had someone review your tax returns? Sometimes, we are able to “add back in” some of the deductions you took. Adding them back in may make you eligible for traditional financing.

      If you’re not already working with a lender on this, I may be able to introduce you to someone with portfolio loan experience. Shoot me an email to scott@findmywayhome.com if you would like an introduction.

      Hope this helps?

  • Pam says:

    Hi Scott, I have been working on buying a house that I have been on a land contract with since 2007. I was pre-approved in 2016, the holder of the loan did not get back to me in time to sign a contract and I had to reapply. The student loan laws changed and my DTI was too high. This has happened several times over the last 2 years and each time the new lender (broker) asks for new information, but says my DTI this time around is 46% and I need to be around 41%. The land contract shows down payment of $4000.00, but lender keeps pulling my credit every three months and says FHA will not accept deferment or forbearance. They want a fully amortized payment. I will be getting in touch with the student loan lender, but I am weary that the broker is not looking out for my best interest.

    • Scott Schang says:

      Hi Pam, I’m sorry for the delay in getting back to you on this, I’m not sure how I missed it! It’s true that FHA will not accept deferment or forbearance, in fact, no underwriting guidelines currently allow this since 2015. Your only option with FHA is to get a statement from your student loan lender showing what a fully amortized payment would be. If you can get this statement without actually having to take your loan out of deferment, that should be acceptable for the underwriter.

      If you have to go into a repayment plan before getting a statement, a Conventional loan using Fannie Mae underwriting guidelines will allow you to use an Income Based Repayment (IBR) when calculating your debt to income ratios.

      If your lender has not offered you any other guidance or options regarding your student loans, I can definitely help with a second opinion. Shoot me an email to scott@findmywayhome.com and let me know what State you’re trying to buy in. I can introduce you to a loan officer that I know and trust that has extensive experience with student loan guidelines.

      Hope this helps?

  • John Burke says:

    Hi Scott,
    VA does not require lenders to use 1% of the balance if the student loans are in deferment or forbearance. In addition, the guidelines do not differentiate between amortizing & non amortizing payments. According to VA Circular 26-17-02:
    If the payment reported on the credit report is less than the threshold payment calculation
    above, the loan file must contain a statement from the student loan servicer that reflects the
    actual loan terms and payment information for each student loan(s). The statement(s) must be
    dated within 60 days of VA loan closing and maybe an electronic copy from the student loan
    servicer’s website or a printed statement provided by the student loan servicer. It is the
    lender’s discretion as to whether the credit report should be supplemented with this information.

  • American Dream says:

    Hi Scott:

    You have no idea how fortunate I am to have come across your information. I have taken your advice and have contacted the company for my student loans. Hopefully, they will be able to provide me with a lower IBR than the 1% rule. I live in GA and I am not sure how the Fannie Mae Underwriting works. Can you provide more information? I have calculated my DTI with the IBR being 0.00 monthly and it calculated my IBR at 26%. How can I find out what the guidelines are for Fannie Mae?

    • Scott Schang says:

      I’m glad you found us! I have a loan officer friend that has a lot of experience with Fannie Mae IBR guidelines that I can introduce you to.

      The basics you would want to know about qualifying for a Fannie Mae loan are: Check eligibility for HomeReady for the lowest down payment requirement. Your maximum DTI is 45% under most circumstances. We’ve seen up to 50% DTI approval with great credit, reserves, and 10% down.

      If you would like an introduction, shoot me an email to scott@findmywayhome.com. We have an expert that can help in GA!

      Hope this helps?

  • Jessica says:

    Hi Scott! I am growing increasingly frustrated with the constantly changing lending rules. With a majority of Americans drowning in student debt, the idea of home ownership seems more like a dream that will never come true. I have > $200K in student loans, of with $150K are on IBR and in queue for PSLF. At the time of closing (? Dec 2020… working on some credit issues), I’ll be 6 years to forgiveness. Unfortunately this cant be excluded from by DTI due to the < than 10 month rule. It seems that FNMA is my only option, but I'm holding my breath because she may jump on the bandwagon with Freddie. I'm at my wits end. Any advice?

    • Scott Schang says:

      Hi Jessica, it’s not nearly as difficult as you may think. If your point of reference is talking to loan officers who’s only interest is trying to make a buck off you right now, I can see where your frustration can be elevated and your outlook bleak.

      I promise you it’s not nearly as back as you think. Here’s what you have to remember…lender lend money. Period. They don’t make money if they cannot lend money. Fannie Mae was actually the last one to “come around” and understand that student loan debt is not as much of a time bomb as previously thought in 2015.

      It was only January of 2018 that Fannie came out and stated that they will accept an IBR payment, even if that payment is $0. The “tightening” of the rules were born out of the uncertainty of what, if any financial hardship may occur when these student loans begin to mature and are required to be paid back. The banks didn’t want a bunch of foreclosures on their hands similar to what we just went through in 2008.

      As far as your credit report goes, it should not take 2 years to fix credit in most cases. Credit scores tend to be one of those things that people believe is way more mysterious and scary than it actually is. There is a simply formula to better credit, but the schools do not teach people how these things work.

      What you are missing in your situation is a trusted expert that is willing to guide you through this process and demystify all of these mole hills that you perceive to be mountains.

      I’m happy to talk more, and I can even introduce you to a loan officer that I know and trust that will help you on this journey, even if it takes until Dec. 2020 before you’re ready to buy. Communities support each other, and that’s what we are, a community of experts that want to help consumers demystify the home buying process.

      If you would like to chat more about your specific situation, feel free to shoot me an email directly to scott@findmywayhome.com and I can get you pointed in the right direction!

      Hope this helps?

  • Stressed home buyer says:

    Good afternoon,
    My new husband and I are moving to a community property state. We are both on IBR plans. We have been applying for a USDA loan which just went into underwriting. My DTI with the IBR plan is right at 41% and this includes my spouses debts. We are worried that the underwriting will be different than what the loan officer expects. The closing costs are high. How does working with a conventional loan change the closing costs if we need to switch mortgage types? Our expected closing date is 7-20. Thank you for your help. We are first time home buyers.

    • Scott Schang says:

      Hi Stressed Home Buyer, there are a couple of questions here, let me try to tackle them in the order asked.

      USDA is going to use a calculation of 1% of the loan balance for your student loans. USDA will not allow you to use your IBR payment when calculating your debt to income ratio.

      Your fear of the underwriting being different from what the loan officer expects is a very real concern. Unfortunately, your options and your experience are completely dependent on the experience and expertise of the loan officer that you are working with. I am really hesitant to use the word “loan officer” because in many cases, you are not talking to a professional. Many lenders hire customer service people to collect your information. I hope this is not the case with this lender.

      I’m not sure why your closing costs would be higher with a USDA loan. Most closing costs come from title, escrow (closing services), and impounds. Impounds is the collection of your property taxes and homeowner’s insurance so that the lender can pay these costs when they become due. This would be the case regardless of what type of financing you’re using.

      Conventional financing does not inherently have higher closing costs, however, the interest rate is more sensitive to credit scores and loan to value (down payment). As a result, a lower credit score and low down payment could result in a higher interest rate than if you are using USDA or a FHA loan.

      All this said, if using 1% of your student loan balance is going to make your debt to income ratios too high, then a Fannie Mae conventional loan is your only option. If you loan officer is saying different, then you are not working with a professional loan officer, and your worst fears are more likely to come true.

      Closing on 7/20 is not going to be a problem if you are working with a professional that can identify any challenges up front.

      Based on the fact that you’re online trying to research your own answers to questions and concerns that you have, and you are obviously not super confident in the experience or expertise of your loan officer, I would recommend you get a second opinion.

      I am happy to introduce you to a professional loan officer that I know and trust, that has extensive experience with IBR student loans.

      If you would like a second opinion, shoot me an email to scott@findmywayhome.com, and let me know what State you’re buying in.

      Hope this helps?

  • Brittany says:

    What work around could my lender possibly be considering when I am on an IBR plan and applying for a USDA loan? We can’t use the 1% because of DTI so I just don’t know why I am being strung along when it seems clear to me I shouldn’t have been approved in the first place. The initial closing date was 5/31/18 and we keep having to extend it.

    • Scott Schang says:

      Hi Brittany, there are only two work arounds. The first is to go into a fully amortized payment on the longest possible term that your student loan lender will allow. The fully amortized payment will be considerably less than 1% of the balance.

      The second option is to switch to a Fannie Mae conventional HomeReady loan, which will allow as little as 3% down payment. Fannie Mae guidelines are currently the only option for using your IBR Payment when calculating your debt to income ratio.

      It is unfortunate that your lender was unfamiliar with the underwriting guidelines and allowed you to get into this situation in the first place. I wish it was less common than it is that inexperienced loan officers are allowed to put consumers into these situations.

      Hope this helps?

      • Terri says:

        I am in the exact same position with a close date of 6.29.18. The difference is that initially started out as an FHA loan with another lender but it when it came time to sign the actual approval, the rate and the fees where more than had been quoted and higher than the actual govt rate … and yes, my credit score is just fine. I dumped this lender and began with another who told me about the USDA Loan .. ha! I guess the joke is on me. Is there anyone in Kansas that you can refer me to?

        • Scott Schang says:

          Yes Terri, I can absolutely help! I have your email address, I am going to introduce you to Mia Schultz. Mia is a professional loan officer that is an expert with IBR student loan guidelines.

          Look out for an email introduction. By the way, if you meet the guidelines for USDA, it’s likely that you will also qualify for a Fannie Mae HomeReady loan that only requires a 3% down payment.

          Hope this helps?

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