Freddie Mac Stops Allowing $0 on IBR Student Loans
Qualifying for a mortgage with income based student loan payments just got a little harder.
- Freddie Mac stops allowing $0 payment when calculating debt to income ratio
- Fannie Mae is “last man standing” for allowing $0 IBR payments on mortgage applications
Freddie Mac announced on October 18th, 2017 that they are updating the way that payments are calculated on IBR student loan repayment plans when trying to apply for a mortgage to buy or refinance a home.
2017 Freddie Mac IBR Guidelines
2017 Student Loan in Repayment
When a monthly payment is not reported, your lender must obtain documentation verifying that the loan is in repayment and what payment is required per the terms of your loan.
For mortgage applicants that have an income based repayment plan with a payment of $0, your lender only needed to verify that the loan is indeed in repayment, and many lenders would allow you to use the $0 payment when calculating your debt to income ratios.
2017 Student Loan in Deferment or Forbearance
If no monthly payment is reported on the credit report, and no payment is required on an outstanding student loan, 1% of the outstanding balance will be used as the monthly amount when calculating your debt to income ratios on your mortgage application.
NEW – 2018 Freddie Mac IBR Guideline
2018 Student Loan in Repayment
Effective January 18th, 2018, Freddie Mac will update it’s automated underwriting system, LPA (Loan Products Advisor) to take a more conservative approach to calculating IBR payments on student loans when applying for a mortgage.
If you in an income based repayment plan that is currently in a repayment status (not deferred or in forbearance), lenders must now use the greater of the actual payment, or .5% of the original loan balance or outstanding balance as reported on the credit report, whichever is greater.
2018 Student Loan in Deferment or Forbearance
If no monthly payment is reported on the credit report, you must use 1% of the original loan balance or outstanding balance as reported on the credit report, whichever is greater.
2018 Student Loan Forgiveness Guidelines
Student loan forgiveness programs like PSLF (Public Service Loan Forgiveness), student loan cancellation, discharge and employment-contingent repayment programs were not specifically addressed in previous versions of Freddie Mac IBR guidelines.
Updated 2018 guidelines will allow lenders to exclude the student loan payment from your monthly debt to income ratio if you can document the following:
- The student loan has ten or less monthly payments remaining until the full balance of the student loan is forgiven, canceled, discharged or in the case of an employment-contingent repayment programs, paid, or
- The monthly payment on a student loan is deferred or is in forbearance and the full balance of the student loan will e forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid at the end of the deferment or forbearance period.
- You currently meet the requirements for the student loan forgiveness, cancellation, discharge or employment-contingent repayment programs, as applicable, and the lender is not aware of any circumstances that will make the Borrower ineligible in the future.
Student Loan Paid by Others
If your student loan payments are being made by someone else, and you can provide your lender with 12 months of cancelled checks from the account of someone not on the loan application, you can exclude your student loan payment from the debt to income calculation.
Contingent liability guidelines have recently been updated by Fannie Mae and Freddie Mac to allow you to exclude any debt paid by others as long as you can document it.
This will not change how your payments are calculated if your loans are deferred or in forbearance, but might help if you are in repayment.
Fannie Mae to the Rescue?
In early 2017, Fannie Mae updated their guidelines to change the way they look at income based repayment plans for student loans.
Fannie Mae took the stance that Freddie Mac had up to that point to allow you to use any payment reported on the credit report, as long as the loan was not deferred or in forbearance.
This means that Fannie Mae will still allow you to use your IBR payment as reported to the credit bureaus, even if that payment is zero.
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