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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.

Speak to a Loan Officer About Your Student Loans

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.

Find Lenders that Specialized in Student Loans

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

A 20 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

  • CooperG says:

    Hello,

    I am supposed to close for FHA purchase in a few days but now the UW is asking for an amortized payment of my student loans. I’m currently in deferment and PSLF with 10-yr forgiveness. I sent the UW a copy of my loan details showing what my IBR monthly payment would be and the 10-yr term with the exact payoff date. They came back and told me that it’s not paying off the total balance of the loan, but I told them that the balance will be forgiven after 10 years. So I sent them the IDR Recertification letter along with the account details. My servicer also told me that they don’t have a way to provide the amortized schedule because of the forgiveness. Would these be enough to pass through UW?

    Please help. I need a back-up plan.

    • Scott Schang says:

      Hi Cooper, this is very unfortunate – your lender has put you in a very bad spot. If your loans are not amortized, you MUST use 1% of the loan balance as a payment for the purposes of calculating your debt to income. If you do not qualify using a 1% calculation, you cannot use FHA. You DO have 2 other options.

      Fannie Mae will allow you to use an IBR payment, even if it’s $0. Freddie Mac will allow a .5% calculation if your loan is in deferment currently.

      It might be too late for this, but if you need a second opinion from a lender that actually has experience with these guidelines, shoot me an email to scott@findmywayhome.com and let me know what State you’re in.

      Hope this helps?

      • CooperG says:

        Thank you for response!

        I don’t think I’m qualified for a conventional loan at this point because my scores at the low 600s. I’m in MD.

        • Scott Schang says:

          You only need a minimum 620 credit score for conventional. If this sale falls out, you need to work with someone that actually knows what they are doing. What company are you working with that let you get this far? You could lose your earnest money deposit and anything you spent on inspections because your loan officer does not have any experience. This should be illegal to put folks in that position. Go ahead and let it play out. If they tell you they cannot do it, shoot me an email and I can make an introduction to someone that can help put you in a position to qualify for a conventional loan. Good luck!

  • Valerie Thorpe says:

    Hi, I have applied for a conventional mortgage through my credit union in NC (First time home buyer). I currently have appr. $54,000 in student loan debt. I am currently in school (since March) and the loans are under in school deferment. Prior to them being in deferment; they were in IBR; which had a zero payment due. I am not due to graduate until 05/21; will these loans be counted against my DTI? Any help would be great! I am waiting for underwriting to let me know the outcome. Biting my nails!!

    • Scott Schang says:

      Hi Valerie, if the Credit Union is selling the loan on the secondary market, then yes – for most deferred payment, the underwriter is going to most likely use a calculation of 1% of the student loan balance for the purposes of calculating your debt to income ratio.

      It’s also possible that the Credit Union will retain and service the loan, in which case they may have their own guidelines.

      If the credit union comes back and says that you do not qualify, that simply may mean that you do not qualify based on their guidelines.

      If you can put that loan back into an IBR payment of $0, Fannie Mae conventional underwriting guidelines will allow you to use the $0 payment.

      If your loans are deferred, Freddie Mac conventional underwriting guidelines will allow you to use a .5% calculation, which may help.

      If your credit union comes back and says they cannot do it, shoot me an email to scott@findmywayhome.com and I can introduce you to someone I know and trust that has experience with these guidelines.

      Hope this helps?

  • LaTonya says:

    I have $280,000 in student loans. I should complete my Phd. this year. My income is $80,000 I only have about $500 on debt other than the student loans and I was told that if I tried to get a FHA loan my student loan debt will be counted as 1% of my debt. For conventional I need to be on a IBR plan. How can I qualify for a home loan?

    • Scott Schang says:

      Hi LaTonya, yes, that’s correct. If you’re trying to qualify for a FHA loan, your student loans must be in repayment, or use a fully amortized payment plan (pays off at end of fixed term) for the purposes of calculating your debt to income ratio. Without an amortizing payment, FHA would require you to use a $2,800 payment for qualifying…that’s not going to work.

      Conventional loans offer 2 options. If you are in an IBR repayment plan, you can use a Conventional loan underwritten using Fannie Mae or Freddie Mac guidelines. If your loans are currently deferred, Freddie Mac conventional will allow you to use .50% instead of the 1% calculation.

      The key is to work with a loan officer that has experience with these guidelines. Once you know what your options are, an experienced loan officer can help guide you down the path to qualifying for the program you need.

      I have a handful of friends across the Country that have experience with student loan guidelines that I can introduce you to. Shoot me an email to Scott@findmywayhome.com and just let me know what State you’re buying in.

      Hope this helps?

  • Lydia Stallion says:

    Hi Scott,

    I have 97,000 in student loan debt and on an income based payment of $0. I make roughly 40,000 a year. My lowest credit score is 627. I have 27 late payments on my student loans about 4 to 6 years ago. One collection(just on one credit report) that refuse to allow me to pay and delete. Do you think I can get a mortage in my area. Help me please…

    • Scott Schang says:

      Hi Lydia, I nothing you’ve stated here would prevent you from qualifying necessarily. The $0 IBR payment is ok if you’re using a Conventional mortgage using Fannie Mae guidelines. The minimum credit score for a Conventional loan is 620.

      The late payments 4-6 years ago should not impact your credit score or your ability to qualify for a mortgage. If you are unable to get an automated underwriting approval, it shouldn’t be too difficult to get your credit scores up.

      If you would like, you can send me an email to scott@findmywayhome.com and let me know what State you’re buying in? I can introduce you to someone that I know and trust that has experience with student loan guidelines.

      Hope this helps?

  • Am_Holl says:

    Hello Scott,

    I have roughly $220,000 in student loans, and I am on the IBR plan with monthly payments of $225. I am in Cleveland, Ohio.

    My credit score is low – in the 600 range – as I stupidly co-signed on a car loan for a (now ex-) boyfriend and he was consistently late on payments for a solid year or so. I make $60,000 a year. Do you know anyone in my area that can help?

    • Scott Schang says:

      I do know someone that can help. The challenge might be getting approved for a Conventional loan (Fannie Mae) so that you can use the IBR payment when calculating your debt to income ratio. You would have a better chance at qualifying for an FHA loan with FICO in the low 600 range, but FHA will require that you use 1% of your student loan balance as a payment….

      I will send an email introduction to Mia. Talk to her, let her try to run it through the automated underwriting engine and see what comes back. Worse case scenario is you may have to work on your credit to get the scores up.

      Hope this helps?

  • happy_chrissy says:

    HI Scott,

    I have about $150k in student loans and is on the IBR $559 in New York. Credit score 685 and I have about $34k in credit cards. Do you have anyone in my area that can help me and I make $100k?

  • Mona Phillips says:

    I have a student loan from 1988 which was 5000 but now is 32000. I have never made a payment and never will. I am zero payment IBR. I qualify with USDA rural development but at a low loan amount and can’t find housing. Thinking of FHA. What to do

    • Scott Schang says:

      Hi Mona, Your $0 IBR payment is not an issue if you’re using a Conventional loan. If you qualify for a USDA loan, you also most likely qualify for Fannie Mae HomeReady, which only requires a 3% downpayment, and allows you to use the $0 IBR payment.

      FHA and USDA are both going to require that you use 1% of the balance to calculate a “payment” for the purposes of calculating your debt to income ratio. In your case, the “payment” used would be $320.

      I can introduce you to a loan officer friend of mine that has experience with these guidelines. If you would like an introduction, shoot me an email to scott@findmywayhome.com and I can connect you.

      Hope this helps?

  • Sheila G says:

    I stumbled across this site when i googled about having student loan debt in IBR and buying a home. I have about 40,000 in student loans that are in IBR status. My current payment under the IBR plan is 0.00. Me and my new husband are looking to buy a home within 1 year. I will of course be resubmitting for the IBR payment plan every year. What should I do or need to do to prepare myself for the home buying process while under the IBR plan? My husband also woks and has no student loan and our debt is under 18%. TIA

    • Scott Schang says:

      Hi Sheila, if you are applying for a Conventional loan using Fannie Mae guidelines, you can use the $0 payment as long as the loans are not deferred or in forbearance. As long as the loans are in repayment, you can use the payment on the credit report.

      That said, many loan officers do not know these guidelines. For instance, if you try to apply for a FHA loan, you would have to use 1% of the loan balance as a payment when calculating your debt to income ratio. You may still be alright if your DTI is currently at 18%.

      I have a small network of loan officers across the Country that I know and trust that have experience with these guidelines. I’m happy to make an introduction once you get to that stage of the process.

      Just shoot me an email to scott@findmywayhome.com and let me know what State you’re buying in, and I can make that introduction.

      Hope this helps?

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