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2019 Guide to Qualifying for a Mortgage with IBR Student Loans

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

UPDATE January 2019:  Student loans will continue to be a major topic, and we will follow it closely.  These guidelines are confirmed to be accurate in 2019.

UPDATE 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

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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.

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.

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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.

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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.

2019 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

  • 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

  • Marie says:

    Good morning Scott,
    I have 704 credit score make about 35,000 and over 200, 000 in student debt. I’m on IBR. Can someone like me be helped? Thank you.

    • Scott Schang says:

      Good morning Marie, 100% you can absolutely be helped 🙂 With a Conventional mortgage using Fannie Mae underwriting guidelines, you can use the IBR payment when calculating your debt to income ratios. Unfortunately not many loan officers have a clue about these guidelines, and even more surprising is how many underwriters do not know these rules.

      If you would like an introduction to someone I know that has experience with qualifying with IBR payments, shoot me an email to scott@findmywayhome.com and let me know what State you’re buying in 🙂

      Hope this helps?

  • brittany moore says:

    Hi Scott,

    Thank you so much for creating this space. There is so much different information available out there and it can become very confusing . I’m attempting to get a USDA loan. My credit score is 710 and my student loan debt is 93k. I setup a term based plan to payoff my student loans so my DTI would now be 18%.. is there anything you believe I should be watching out for? I’m wanting to start the loan buying process within the next few months.

    • Scott Schang says:

      Hi Brittany, as long as your payments will pay off the loan at the end of the term (amortized payment), then you are ok with USDA. The only challenge you may find is if your loan is deferred or in forbearance.

      IF your payment is fully amortized, and the lender tries to use any other calculation, you may just we working with someone that doesn’t have experience with calculating student loans. I can introduce you to someone that is familiar with these guidelines if you would like?

      When you’re ready, just shoot me an email to scott@findmywayhome.com and let me know what State you’re in.

      Hope this helps?

  • Rocky Justice says:

    Hi. Your site is amazing so thank you. My credit is 609 and my partners is 690. I have 300000 in student debt and he has 70k. Which loan type would be best and can we use ibr payments on credit or .5%?

    Thank you.

    • Scott Schang says:

      Hi Rocky, thank you for the kind words 🙂 The ability to use your IBR payment, or Freddie Mac’s .5% calculation is going to require that you qualify for Conventional (Fannie Mae or Freddie Mac) financing. If your income is required to qualify for the loan amount you need, then your credit score is also going to come into play. Conventional financing requires a minimum 620 middle credit score on the lowest scoring borrower. Right now, you would qualify for FHA financing, but that will require a 1% calculation.

      There are two solutions here. If you can qualify with only your partner’s income, you’re golden for going Conventional. The other option is to try to raise your score above 620. I would be willing to bet that would only require paying down one or more maxed out credit cards.

      Most professional loan officers will help walk you through this process of raising your scores. DO NOT pay a company to fix your credit – have your loan officer try it first. If they don’t know how, get a new loan officer!

      If you would like an introduction to a loan officer friend of mine that has experience with student loan guidelines, shoot me an email to scott@findmywayhome.com, and let me know what State you’re trying to buy in. I’m happy to connect you 🙂

      Hope this helps?

  • talisha brown says:

    Hello,
    We are also trying to get a home loan. We recently received a pre approved letter but days later the loan officer called and said he could not give the per-approval because his bank now takes into account the 1% of student loan debt. My credit score is currently 659. HELP!!!

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