Student Loan PAYE, REPAYE & IBR Mortgage Guide

Paying For Education

Pursuing an advanced education is getting more and more expensive. Especially if you’re pursuing an advanced degree.

Unless you or your parents started putting away savings years ago in a college fund, you are most likely going to need financial assistance to get you through those long years of preparing for your profession of choice.

Depending on your degree and your professional path, I commonly see student loan balances pushing well into the hundreds of thousands of dollars.

Often times, student loan lenders are quick to tell you not to worry about paying back your loan, because there are programs available to help make those payments more manageable until your income comes to full fruition.

While it is possible to scale the repayment of your student loans, it might come at an even greater cost than your education.  It may come at the expense of buying your first home.

Student Loan Repayment Options

There are several payment plans available to graduates that need a little breathing room once your student loans come due.

REPAYE Plan – Generally based on a calculation of 10% of your discretionary income.

PAYE Plan – Generally 10 percent of your discretionary income, but never more than the 10-year Standard Repayment Plan amount

IBR Plan – Generally 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014*, but never more than the 10-year Standard Repayment Plan amount.  Or, 15 percent of your discretionary income if you’re not a new borrower on or after July 1, 2014, but never more than the 10-year Standard Repayment Plan amount.

ICR Plan – The lesser of the following:

• 20 percent of your discretionary income or
• what you would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to your income

*For the IBR Plan, you’re considered a new borrower on or after July 1, 2014, if you had no outstanding balance on a William D. Ford Federal Direct Loan (Direct Loan) Program loan or Federal Family Education Loan (FFEL) Program loan when you received a Direct Loan on or after July 1, 2014. (Because no new FFEL Program loans have been made since June 30, 2010, only Direct Loan borrowers can qualify as new borrowers on or after July 1, 2014.)

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The Lure of the Zero Payment

Let’s face it, if you don’t have to pay back your student loan, I don’t know many people that are eager to make payments that may be able to go into your savings, or day to day living.  I often see loan payments on REPAYE, PAYE, or IBR loans that report a payment $0.00.

In order for you to a ZERO payment on one of these student loan repayment programs, you would need to report that you have no disposable income after paying your living expenses each month.

Now, I get it.  I know that the urge to introduce a little fuzzy math into the equation to show that you have no disposable income, and therefore need a $0.00 payment on your student loan is just too great to deny.

The problem with with this is that if you want to buy a home, and need to qualify for a home mortgage, you cannot have a zero payment on your student loans.

Qualifying for a Mortgage

Last year, Fannie Mae, FHA, USDA and VA updated their guidelines to change the way that student loan payments are calculated as part of your debt to income qualifying ratios when applying for a home mortgage loan.

Deferred payments are no longer allowed.  To add to the bad news, all of these guidelines added wording into their guidelines to require that the payment that you must use for qualifying must pay off the entire student loan balance at the end of the repayment term.

For those in the Public Service Loan Forgiveness program, this is especially challenging.  When given the ability to make a student loan payment based on your discretionary income, and knowing that your loan balance will be forgiven at the end of 10 years, why would you make a payment that will pay that loan off before that time?

There is only one option left for those saddled with student loan debt to buy a home without having to pay off your student loans.  With Conventional financing using Freddie Mac underwriting guidelines, you are able to use your REPAYE, PAYE, or IBR payment as long as that payment is not ZERO.

Solution?  Make sure that your payment is not ZERO.  It’s really that easy.

Qualifying for a Conventional Mortgage

Worried about using a Conventional loan to buy your home?  You shouldn’t be.  Many homebuyers believe that Conventional loans require a 20% down payment, and this simply is not true.

Conventional home loans are available with as little as 3% to 5% down payment.  You always have the option of removing private mortgage insurance once you pay down the balance of your loan.

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Or you can include the mortgage insurance in your interest rate (lender paid mortgage insurance – LPMI) and convert that PMI into tax deductible mortgage interest.

Need Help Finding a Lender?

The most difficult part of trying to qualify for a home loan when you have REPAYE, PAYE, or IBR student loan payments is finding a lender that knows these underwriting guidelines and has the experience to help.

If you would like an introduction to a lender that has experience with Freddie Mac underwriting guidelines and can help, you can catch us most days taking questions through live chat on the lower right corner of this article, or answering questions in the comment section below.

Please feel free to ask any questions below, on chat, or by email.

This is also a great opportunity for you to anonymously ask an experienced professional that has no financial interest in how how your question is answered.