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Qualifying for a Mortgage with Income Based Repayment (IBR) Student Loans

Getting a Mortgage with Student Loans

Qualifying for a mortgage when you have IBR student loans can put you on quite a roller coaster.  The underwriting guidelines have changed several times in the past 2 years, and have left many lenders unable to keep up.

After the most recent update, here are the loan programs that will allow you to use income based payments:

  • Fannie Mae Conventional MortgageAllows IBR payment.  Document repayment status with credit report.
  • Freddie Mac Conventional Mortgage – Allows IBR payment.  Must document repayment status with credit report.
  • FHA MortgageNo IBR payment.  Payment must be fully amortized or use 1% of balance as qualifying payment.
  • VA MortgageNo IBR payment.  Payment must be fully amortized or calculate balance by 5%, divided by 12.
  • USDA MortgageNo IBR payment.  Payment must be fully amortized or use 1% of balance as qualifying payment.

Loan officers that have been unable to keep up with these guidelines will most often quote the 1% of the balance calculation when qualifying a home buyer.

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As you can see by scrolling through the hundreds of questions and answers below, there is a lot of misinformation out there about this topic.


FindMyWayHome.com Podcast:  How to Buy a Home with Student Loans?

I am joined by Josh Lewis of BuyWise Mortgage as we discuss  the recent changes in how student loans are calculated into your debt to income ratios when qualifying for a mortgage.

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How to Qualify for a Mortgage with Income Based Student Loan Payments

Posted by FindMyWayHome.com on Wednesday, July 26, 2017

Click Here for Show Notes and Valuable Links


Article Originally Published March 16th, 2016

We’ve been following this issue since the beginning.

As more Millennials are looking to buy their first home, many are faced with the challenge of student loan debt and how lenders calculate payments when determining debt to income ratios.

Unlike other types of debt that include monthly payments of principal and interest, student loans often have reduced or deferred payments that do not include principal repayment.

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Specifically, Income Based Repayment (IBR) plans limit your federal student loan payments to a percentage of your income. These plans can go a long way towards making payments manageable for young professionals just entering the workforce at entry level salaries. For those with very low income, payments can be as little as $0.

This is where things get interesting for mortgage lenders seeking to make sound underwriting decisions. Should they calculate debt to income ratios using the payment set under the IBR plan?

Or, since the payments must eventually rise if the loan is ever to be paid off, should they use some type of proxy for a fully amortizing payment?

The answer depends on the type of mortgage you are applying for. Since the vast majority of borrowers with student loan debt aren’t looking at Jumbo loans, we’re going to focus on the different ways Fannie Mae, Freddie Mac, FHA, VA and USDA answer this question.

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If you love details, you can read the entire guideline in italics. If you like to get right to the point, skip to the BOTTOM LINE in bold.

IBR Using a Conventional Fannie Mae Loan

UPDATED April 25th, 2017 – Fannie Mae has recently updated its guidelines to allow borrowers to use the payment that appears on your credit report.  That can be an IBR, PAYE, or REPAYE payment that does not pay off your loan at the end of the term.

If no payment is reported on the Credit Report, the lender must use one of the options below to determine the repayment amount:

  • 1% of the outstanding balance;
  • the actual payment that will fully amortize the loan(s) as documented in the credit report, by the student loan lender, or in documentation supplied by the borrower:
  • a calculated payment that will fully amortize the loan(s) based on the documented loan repayment terms: or
  • if the repayment terms are unknown, a calculated payment that will fully amortize the loan(s) based on the current prevailing student loan interest rate and the allowable repayment period shown in the table below.

The current prevailing student loan interest rate’ can be found on a variety of websites. For example. see U.S. Department of Education Federal Student Aid in E-1-03. List of Contacts.

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The following table specifies the repayment period to be used when calculating a fully amortizing payment.

Calculating a Student Loan Repayment

Total outstanding balance of all student loansRepayment Period
$1— $7.49910 years
$7.500 — $9.99912 years
$10.000 — $19,99915 years
$20.000 —$39.99920 years
$40.000 — $59.99925 years
$60,000 +30 years

Note: The lender is responsible for determining that the payment on the credit report or other documents provided by the student loan lender or borrower are fully amortizing payments.
Example: Calculating an Amortizing

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Payment Balance: $17.500
Repayment period: 15 years
Interest rate: 4.29%
Monthly Amortizing Payment: $132.00

BOTTOM LINE:  Use the actual amortizing payment. If you are unable to document the actual amortizing payment, use the calculated payment using the method above as it will nearly ALWAYS be less than 1% of the balance. If ALL ELSE FAILS, use 1% of the outstanding balance.

IBR Using a Conventional Freddie Mac Loan

When a monthly payment on an installment debt is not reported on the credit report or is listed as deferred, the Seller must obtain documentation verifying the monthly payment amount included in the monthly debt payment-to-income ratio.

If no monthly payment is reported on a student loan that is deferred or is in forbearance, and there is no documentation in the Mortgage file indicating the proposed monthly payment amount (e.g., the loan verification letter), 1% of the outstanding balance will be considered to be the monthly amount for qualifying purposes.

Examples of documentation of the required payment amount include:

  • A direct verification obtained from the creditor
  • A copy of the installment loan agreement obtained from the Borrower, or
  • If payments are currently deferred, the payment amount that will be required once the deferment or forbearance period has ended, as stated in a copy of a financial institution’s student loan certification or the installment loan agreement

While the Freddie Mac seller guide has not changed since the publishing of this article, we have spoken directly to Freddie Mac and received confirmation that they will in fact use the IBR payment when calculating debt to income ratios.

BOTTOM LINE:  Use the documented IBR payment as long as it is greater than zero. For any loans with no payment, including IBR loans, the lender must fall back to the forbearance guidelines and use 1% of the outstanding balance unless you are able to provide documentation verifying the proposed monthly payments will be less than 1%.

IBR Using a Government FHA Loan

FHA 4000.1 Section II. A. 4. B. (H)

(4)  Calculation of Monthly Obligation

Regardless of the payment status, the Mortgagee must use either:

  • the greater of:
  • 1 percent of the outstanding balance on the loan; or
  • the monthly payment reported on the Borrower’s credit report; or
  • the actual documented payment, provided the payment will fully amortize the loan over its term.

BOTTOM LINE:  Unless you are able to provide documentation from your lender showing the actual payment that would amortize your loan in full over a fixed loan term is less than 1% of the balance, the lender will use 1% of your outstanding loan balance as the payment.

IBR Using a Government VA Loan

Student Loans (5/1/2017)

  • Deferred Student Loans: If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis.  If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.
  • Student loans in Repayment:

If a student loan is in repayment or scheduled to begin within 12 months from the date of a VA loan closing, you must consider the anticipated monthly obligation in the loan analysis.

The anticipated monthly obligation should use the greater of:

Calculated payment at a rate of 5% of the outstanding balance divided by 12 months (example:  $25,000 student loan balance x 5% = $1,250 divided by 12 months = $104.17); or the payment reported on credit report

Standard Repayment Plan: The required monthly payment is to be used for qualification purposes.

If a monthly payment is not reflected on the credit report or there is need for the payment amount required for qualification purposes, documentation, as evidenced by a letter from creditor or repayment schedule, is required to verify monthly payment.

BOTTOM LINE: Use the above formula for to calculate any payments that are not fully amortized to pay off at the end of the term.

IBR Using a Government USDA Loan

If the borrower has a student loan with an income based repayment, you must use 1% of the balance. Below you will find the guideline directly from the USDA underwriting manual:

Student loans. Lenders must include the greater of

  • One percent of the outstanding loan balance. OR
  • The fixed payment as reflected on the credit report.

Income Based Repayment (IBR) plans; graduated plans, adjustable rates, interest only and deferred plans are examples of repayment plans that are subject to change and do not represent a fixed payment or repayment plan. These types of repayment plans are unacceptable to represent a long term fixed payment repayment plan.

WHAT DOES IT ALL MEAN?

VA and USDA loans are both limited. Unless you are a veteran or buying in a “rural” area as defined by the USDA, these loans aren’t an option. If they are, the good news is both have straightforward, borrower friendly treatment of IBR plans.

For most people, the question will come down to which programs you qualify for and then which offers the most favorable income based repayment calculation. If you need to use FHA due to lower credit scores or higher debt to income ratios, things just got a lot tougher.

After offering guidance earlier this year allowing the use of IBR payments, the current guidelines require documentation of the actual amortizing payment or 1% of the outstanding balance will be used. In either case, the payment used for qualifying will be higher than the current IBR payment.

If your loan balance is relatively large, this treatment will likely erase much, if not all, of the benefit of FHA’s higher debt to income ratios.

If you are able to qualify using Fannie Mae or Freddie Mac programs, you have a good bit more flexibility. In most cases, a borrower that can be approved through Fannie Mae’s automated underwriting system (AUS) will also be approved through Freddie Mac’s AUS.

This is great news if you have an IBR payment that is greater than zero. Freddie will use the IBR payment reported on the credit report so you should be home free.

If you are working with a lender that ONLY offers loans underwritten to Fannie Mae guidelines OR you have an IBR payment of $0, Fannie has an option that will not be as bad as using 1% of the balance.

Let’s look at an actual scenario for a borrower I’m working with right now.

She’s looking to buy a home for $350,000. Her income is just over $72,000 per year. She just went through the annual review on her IBR plan and for the next 12 months she pays $146 a month on roughly $117,000 of student loan debt. If you’ve been paying attention up to this point, you see where this is going.

Since she has good credit and her debt to income ratios are under 45% using the IBR payment, we’re in luck. We can use Freddie Mac guidelines and pull the $146/month from the credit report and she’s good to go.

WHAT IF, her IBR payment had been set at zero? In that case, we could look at going FHA. Under current guidelines we simply use 1% of the $117,000 loan balance as the monthly payment. The bad news is this pushes us over the maximum FHA debt to income ratio of 56.9%. That doesn’t work so let’s move on to Fannie Mae.

Assuming her lender would not give us documentation of a fully amortizing payment AND her loan documentation doesn’t provide enough information for us to calculate the amortizing payment, we have to use the calculated method using the ‘current prevailing student loan interest rate’.

Using the chart above we see that we use a 30 year term and the current prevailing interest rate is 4.29%. That leaves us with a monthly payment of $578. Even though the calculated payment is much higher than the actual IBR payment, we can keep the debt to income ratio just under the maximum 45% and approve the loan.

The bottom line is, “it’s complicated.” But there are options and if you’re working with an experienced loan officer who understands the intricacies of student loan qualifying guidelines, there should be an option for you. As always, we’re here to help. If you have any questions, or specific scenarios reach out directly or in the comments section below.


Fannie Mae Guidelines Updated March, 2017

Student loans and mortgage qualifying are indeed a hot topic. Since first posting this article in March 2016 both FHA and Fannie Mae have made significant changes to their treatment of Income Based Repayment student loans as recently as April 2017.

Some of the changes will help those with IBR student loans while others most certainly will not.

There are questions and answers in the comments section of this article every day.  This information is always kept up to date, and will always have the most current guidelines.

Feel free to ask your questions below, or reach out to us directly if you have specific questions, or would like an introduction to a lender that has experience with these guidelines and can help.

About Your Expert

Josh Lewis

For 20 years, Josh Lewis, a Certified Mortgage Consultant, has worked with home buyers and their professional advisors to assure that homeownership is a key foundation to long term wealth creation by creating and implementing custom tailored mortgage plans that minimize ownership costs while maximizing wealth accumulation.

Leave a Question or Comment About this Topic

  • Katie says:

    Hi-
    My situation is a mess. We ‘closed’ and moved into our new home at the end of September, in November the lender stated that they did not factor my student loan debt correctly into our back-end ratios and FHA will not insure the loan! I worked with my SL lender to get on an IBR plan which reduces our ratios and puts us back in range but NOW the lender wants me to prove that the loan will fully amortize over the 30 years (which it will not) if I stay on this IBR plan. We put 10% down on this house, our credit scores (are in the high 700’s) and income is $170’s per year. This is a huge mess, my current IBR payment is 1900 per month, is there any recourse for this nightmare?

    • Hi Katie,

      This sounds like more of a lender problem than your problem. The lender is making this your problem because they made a mistake. Any “mess” is something that they are trying to clean up, and it’s not your fault.

      What they are trying to do now is refinance the loan and re-underwrite the loan using different guidelines.

      This is not complicated, your only option for using your IBR payment is to use a Fannie Mae loan using DU automated underwriting.

      Your income is going to be too high to qualify for a 3% down payment, so you’re going to be looking at a 5% down payment. If your current lender is telling you 10% down payment, it may be because they are trying to get your debt to income ratios down.

      Shoot me an email to scott@findmywayhome.com – I can introduce you to a loan officer friend of mine that has experience with IBR payments and helping folks in your situation.

      There might be more to the story that I’m not seeing, but I don’t think this is as much of a mess as you feel like it might me right now.

      Hope this helps?

      • Katie says:

        Thank you for the response. They are trying to reapprove the loan with different terms. If we go with another lender does the original lender have to give our down payment money back? We have already given them 55k for the down and closing plus we have added 15000 in improvements to the home since living here.
        I can reach out tomorrow to discuss in detail.

        • The lender does not have your down payment, you have 10% equity in your home (plus any equity that you’ve accumulated since the closing date).

          You are 100% safe, and in the right. The lender is scrambling to save their own butt, and whether they figure it out, or you go with another lender, it let’s them off the hook.

          Any money you spent in closing costs is spent. If you allow your current lender to refinance you, I would make sure that they cover any costs associated with a refinance.

          You can absolutely reach out tomorrow, I’ll be around. The one thing I want you to take from this is that you’re in the drivers seat, and you have options. All options should work in your favor if you know what your options are. The lender is counting on you not asking questions at this point.

          Let’s talk about it a little bit, and then you can decide what the best course of action would be.

  • Alexandra Martinez says:

    Hello,
    I was interested in a home loan and I am under the income based repayment program with my loans to be forgiven in approx 4 years. I am looking for a mortgage in Flagstaff Arizona. Any help would be excellent.
    Thank you.
    Sincerely,
    Alexandra

    • Hi Alexandra,

      I have a very experienced lender friend that can help. I have your email, I’ll make an introduction by email. Either Grant, or someone on his team can definitely help you!

  • Natasha Royal says:

    I am currently on an IBR payment 146k in student loans. My monthly payment is about $150 a month for my student loans. My dti is good, credit 709. However a lender entered my info for a loan and it was rejected. The lender said it may be since my loans are higher than thAn what they were initially were due to interest. He now has to go through a manual underwriting and says it’s only a 25% I may get approved. What are my other options if I’m not approved.

    • Hi Natasha, your simply doesn’t have any experience with these guidelines. Using conventional financing, you can use your IBR payment. If they are talking about manual underwriting, they are using FHA.

      Send me an email to scott@findmywayhome.com and let me know what State you’re in. Let me introduce you to someone that has experience with these guidelines.

      Hope this helps?

      • Josh Day says:

        I am in the same predicament as most of the commenters. I will be making around $70,000 when I graduate my doctorate program and begin working in November. I have a total of $196k in student loan debt. I have no other debt and a credit score of 746. According to some online calculators, my payment on IBR will be roughly $100/month due to family size and retirement savings lowering income. I am interested in a small multi family (2-4 plex) to reduce my portion of the mortgage. How will this impact my IBR? I had thought about using an FHA203K loan to build in some equity, but it sounds like it is best to pursue another type of loan due to 1% of debt being using for FHA. Are there other loans that allow you to roll rehab costs into the loan besides FHA203K loan? Any help would be appreciated. Thanks!

        • Hey Josh, FHA is not going to allow you to use your IBR payment for your DTI. You’re not going to have as low of a down payment as FHA, but have you looked at conventional? Both Fannie Mae and Freddie Mac allow you to use your IBR payment when calculating your debt to income ratios.

          If you need an introduction to an experienced lender, I can help. Just shoot me an email to scott@findmywayhome.com let me know what State you’re in.

          Hope this helps?

  • Rachel says:

    Hi! I am in the same predicament as most of the commenters. I make $93500. I have a total of $193k in grade school debt. Some additional credit card debt and a credit score of 725. I pay $864/ month for consoldated loan and 107 for a private loan.I am possibility interested in a 2 family to reduce my portion of the mortgage. How will this impact my ibr? Is better to look at a single family loan. I had thought about an FHA loan but it sounds like it is best to pursue another type of loan. Any help would be appreciated. Thanks

    • Hi Rachel,
      You would not be able to use an IBR payment when calculating your debt to income ratio for an FHA loan. Freddie Mac Home Possible will allow you to buy a 2 unit property using your IBR payment.

      The hard part of this is going to be finding a lender that has experience with these guidelines, and that’s where I can help 🙂

      If you would like an introduction to someone that can help, shoot me an email to scott@findmywayhome.com and let me know what State you’re buying in.

      Hope this helps?

  • Elisha says:

    I’m going to hop on this awful IBR bandwagon… I have about 68k in loans, I’m approved for PSLF and my payment on the IBR is $0. Every option I’ve tried here in Idaho has or me over the DTI limits. So do I wait out the 3 years until my loans are forgiven? It seems like there should be consideration for PSLF program during underwriting?!?!?!

    • Hi Elisha,

      The lender you’ve spoken to may not understand the guidelines. Using a conventional loan, you can use your $0 on your IBR loan. As long as the loans are not deferment or forbearance, you can use the $0 payment.

      I have your email address, I will introduce you to a lender friend of mine in ID that has experience with this!

      Hope this helps?

  • Patricia says:

    I can’t find any information out there so far about GRADUATED repayment. My current payment is $256 for 2 years; then it jumps up and has a new stable payment for two years, then increases agin, etc. Can I use $256 for FHA even though it will eventually increase- it still fully amortizes over the 10years.

    • Hi Patricia,

      FHA is going to require that your payment be fully amortized to pay off at the end of a pre-determined term. It would make sense that using the payment that eventually pays off the loan at the end of the term, would be a way to approach this. Do you know what the final graduated payment is?

      The next challenge is going to be to find a FHA underwriter that agrees with me on that. I have not personally run into this specific situation, but I would definitely take this to an underwriter and fight for it.

      The other option would be Conventional financing. Is there any reason why you cannot use a Fannie Mae or Freddie Mac conventional loan? Both of these underwriting guidelines allow you to use the reported payment when calculating your debt to income ratio.

      If you would like an introduction to a lender that I know and trust, and has experience with student loans, shoot me an email to scott@findmywayhome.com with the State you’re buying in, and let’s see if we can get you some solid answers.

      Hope this helps?

      • Patricia says:

        It would eventually be more than the 1%. My underwriter wants to use the 1% rule for approx $455, in the last two years of repayment i think it is around $700 each month. I am looking for a loophole- obviously, because I think the way the rule is worded and the way my verification is also worded I should be able to use the $256 payment. The rule says the actual payment if it full amortizes- which it does, and my verification letter says term: 119 months, based on the current principal balance and interest rate, your accounts total monthly payment amount will be 255.56. Obviously if I apply for a home loan in two years the amount would be different. I’m just wondering who has the final say? Will FHA deny the loan? will the underwriter get in trouble when my payment increases? No where on my verification letter does it say it is a graduated repayment. It is a grey area in my opinion- thanks for being a sounding board and I appreciate any further input you might have.

        • I spoke to an underwriter this morning about this. They stated that FHA will not allow a graduated payment, and that the 1% will be required.

          Your question about who has the final say? At the end of the day, it’s HUD/FHA. If HUD does not insure the loan, the lender who originated the loan is on the hook for an uninsured FHA loan. To a lender, that means you’ve got this loan on the books that you cannot sell, so that you can get your money back to lend to another borrower. It’s called an unsellable loan, or a buyback if the lender if forced to buy the loan back sometime in the future.

          Different lenders have different levels of tolerance for risk. Some lenders have their underwriters taking a very conservative stance, other lenders could take a less aggressive approach. My experience has always been that the rule is that an underwriter is going to take the absolutely most conservative approach to interpreting the guidelines.

          It is my opinion that if you are using FHA financing, your debt to income ratios will be calculated using 1% of the balance as a payment.

  • Elle says:

    Hi, my husband owes 55k in student loans. He has decent credit. And he recently got a job with our county so he’s on the public service loan forgiveness program and since May qualified for a $0 monthly payment since he makes $43,200 and we are a family of 5. As of February when we spoke with a lender, we didn’t qualify because the debt to income ratio and he wasn’t on the program yet. Just wondering if you could tell me how being at $0 now would change from when he was ok deferment. I have bad credit due to hospital bills unfortunately. But like someone else who said who also happens to be frol Wisconsin, we’ve thought about divorcing so I don’t have to be included in the usda since I owe like $9k in hospital bills.

    • Hi Elle,

      As long as the student loan is not currently deferred, you can use conventional financing with a little as 3% down payment. Conventional financing will allow you to use a $0 IBR payment when qualifying.

      USDA is going to require you to use 1% of the loan balance when calculating your debt to income ratios. That basically adds a $55 debt to your liabilities for the purposes of qualifying.

      Divorcing should not be an option, and would not be an issue with a Conventional loan. If you medical bills are in collection status, most automated underwriting systems will not require that medical collections be paid.

      With a Conventional loan, you do not have to be on the loan, and your credit score will not hurt your ability to qualify.

      Hope this helps?

      P.S. I have a fantastic lender that has a lot of experience with IBR payments. I will make an introduction by email.

      • Jackie Ponich says:

        “I have a fantastic lender (in Wisconsin) that has a lot of experience with IBR payments. I will make an introduction by email.” You wrote this to a person from Wisconsin. I am on the 6th or 7th lender/loan rep who insists that I have to calculate the 1% into my total debt. I pay zero on the IDR repayment plan. Is that the same as IBR? I would love your person’s name also so I can get on with my life and buy a residence instead of spending my days researching, emailing and worrying no one will give me the loan. Thank you!!

        • Hi Jackie,

          Yes, I have a great lender in WI that can help. They can also help with your other question regarding automated underwriting decisions.

          I will send an introduction by email now. You should see their contact info in the next 10 minutes.

          Hope this helps

    • I figured that out and fixed it 🙂

  • Nicole says:

    HI I just had my lender tell me tat I can not get approved for an FHA loan because my student loans are 75,000 and with the 1% it will put me over the debt/income ratio limit. I can not get a traditional loan because I am only 2 years out of bankruptcy. Is there any way around this. My student loans are currently in IBR status with $13 a month payments.

    • Josh Lewis says:

      Hi Nicole,
      FHA currently requires the use of 1% of the student loan balances unless a fully amortizing payment can be demonstrated. With IBR, you won’t be able to do that unless your lender can provide you documentation of what the actual amortizing payment would be. In our experience, the only way we’ve seen that happen is when the borrower switches from IBR to a traditional repayment plan.

      Depending on your exact qualifications there are a few options that allow the IBR payment for qualifying, including Fannie Mae and Freddie Mac which both have 3% down options. Where are you located? If you’d like, we can connect you with an expert lender in your area who is well versed in IBR guidelines.

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