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Student Loan Guidelines Make Homeownership Easier

New 2017 Student Loan Guidelines Make Homeownership Easier

Effective Immediately

A new student loan guideline published by Fannie Mae will make it much easier for you to buy or refinance a home in 2017.

Since 2015, Fannie Mae would not allow you to buy a home without calculating a student loan payment that would pay off the loan at the end of the term.

The changes announced by Fannie Mae yesterday will double your chances of getting approved for a home loan if you have high student loan balances, and income based payments.

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Your chances are doubled, because how you have Freddie Mac and Fannie Mae as options.

Fannie Mae vs Freddie Mac Conventional

Both Fannie Mae and Freddie Mac are considered conventional loans.  For the most part, there is very little difference between the underwriting guidelines between the two.

There are very small nuances between the two sets of underwriting guidelines that are not always apparent until you get in a situation where one automated underwriting system will give you an approval, while another will not.

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Freddie Mac has always allowed income based repayment plans for calculating your debt to income ratio.  In some cases, you can qualify for a Freddie Mac loan even if your income based payment is zero.

There is not enough consistency between the reasons why a borrower would get approved for a Fannie Mae loan vs a Freddie Mac loan.  But it happens quite often.

One example is a reader from this site that had an income based payment.  We were able to get a Freddie Mac automated underwriting approval several months ago, then when we tried to update the approval recently, they were no longer qualified.

This stuff happens.  I cannot even begin to tell you how frustrating it can be.

Yesterday, when the Fannie Mae student loan guideline was introduced, we ran it through Fannie Mae’s automated underwriting system and got it approved!

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If your student loan is not deferred, and your payment is zero, the new Fannie Mae guideline will not help, however, Freddie Mac will allow this.

It’s not easy to find a lender that will allow you to use a zero payment on a student loan, but I know several lenders that will.

Student Loan Homebuyer Guidelines

As a homebuyer, your student loan payment must be accounted for in your debt to income ratio.

If you are paying your student loan on a fixed term, then your payment is fully amortized to pay off at the end of the term of the loan, and none of these changes will really affect you.

The new student loan guidelines will only apply if you have an income based repayment plan that does not pay off the loan in a fixed period of time.

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If your student loan is deferred, or if you are on an income based repayment plan like IBR, PAYE, or REPAYE, you would be forced to use 1% of the loan balance when trying to qualify for a home loan.

Student Loan Refinance Guidelines

If you own a home, and have incurred student loan debt over the years, or have co-signed for your Son or Daughter on their student loan, the new Fannie Mae guidelines will help!

Fannie Mae will now allow you to pay off a student loan when refinancing your home, and not count it as a “cash out refinance”.

This is a really big deal.  Fannie Mae considers a cash out refinance as a higher risk loan, and will limit your loan amount, and charge a higher interest rate or closing costs.

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Under this new student loan guideline, you can refinance your home to pay off a student loan, and you will not be subject to the restrictions and higher costs typically associated with paying off debt.

How Do I Get My Questions Answered?

All lenders are not created equal.  Most of the readers that find this site because they’ve been researching solutions to challenges, and have been told 10 different things by 10 different loan officers.

We’ve created this resource to help you sift through the endless opinions and articles that may, or may not directly answer your question correctly.

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There are several ways to ask questions, and get expert opinions on this website.

  • Submit a Question:  On the bottom of this page, you’ll see a prompt that allows you to ask questions.  These questions come directly to me, and are answered very quickly.
  • Leave a Comment:  Below every article is the option to leave a comment or question.  We see these comments and questions in real time and the always answered, usually pretty quickly.

In addition to researching your questions and providing you with expert advice, I may be able to introduce you to a lender friend that I know has experience with your specific situation and can help.

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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

  • Tina says:

    Hello Scott,
    My husband went back to school later in life and has $88,000 in school loans but a monthly payment payment of $0 on the IBR plan (our income isn’t that low, we just have 4 kids!). We have are living in the 2nd house that we have owned but would like to build a home next year. Are there any companies that will give a new construction loan using our $0 IBR payment? We are way over our debt to income ratio is they use 1% of his loan. Also, he is a teacher so most of his loans will be forgiven in 5 years on the Public Service Loan Forgiveness program.

    • Scott Schang says:

      Hi Tina,

      Both Fannie Mae and Freddie Mac underwriting guidelines will allow you to use a $0 IBR payment when qualifying for a home loan. If you use a conventional construction to permanent loan, you should be able to use the conventional student loan guidelines.

      If you would like, shoot me an email to scott@findmywayhome.com and I can try to introduce you to someone that has experience with these programs that may be able to tell you with more certainty.

      Hope this helps?

  • Natosha S says:

    Hi Scott,

    I am having the same issue. I have a 394 monthly car loan, when they had the 1% of the student loan it puts me over my debt to income ratio. I am currently in an income based repayment plan with a 0 dollar monthly payment. Would I qualify for the Freddie Mac?

    • Scott Schang says:

      Hi Natosha,

      Both Fannie Mae and Freddie Mac guidelines will allow you to qualify with a $0 IBR payment, as long as the student loan is not deferred or in forbearance. The challenge is finding a lender that will follow the guidelines.

      The challenge here is that there are no written guidelines that allow this, but it is implied through the nature of the guidelines.

      I know several lenders that are able to use your $0 payment when qualifying you for a home loan. If you send me an email to scott@findmywayhome.com, I would be happy introduce you to someone that can help.

  • Ann says:

    Hi Scott,
    You’re so helpful,thank you. Do you see FHA following the trend of Fannie and Freddie with the student loans and IBR? If so how long will it take? Your thoughts….

    • Scott Schang says:

      Hi Ann,

      Thank you so much for the kind words 🙂 I do expect that FHA will follow the same guidelines. I have not heard anything yet, but Fannie Mae’s decision to allow IBR payments was not just an emotional decision, it’s based on data.

      What’s missing from how FHA is looking at this topic is the fact that those student loans are not just unnecessary debt like credit cards, it’s an investment in your education which will allow you to get better paying jobs in your chosen field in the future.

      There is a “human element” that is missing in the way the FHA guidelines are written now. Since all of this falls under the same Government oversight, the Federal Housing Finance Authority (FHFA), I would think that they will align at some point.

      If anything changes, you’ll hear it here first!

  • Liz Farrell says:

    Thank you so much for your site and your info. You have helped us find a lender and now we are about to close on our first home. My husband has an IBR plan and we couldn’t find a Lender that would calculate the payments of the loan any other way besides 1% of the loan. That puts us as having a payment every month around 700. The actual payments monthly are going to be 9.86 . That’s right!!!! It’s not a typo. That is a huge difference. We found a lender willing to use the actual monthly payments and we are about to get our first home. Your articles have been a tremendous help. Bless you for sharing your knowledge my friend. Keep it up. You are making a difference!!

  • Ann says:

    I have 10 payments left on my installment loan for my vehicle. It is a lease. Are there any loan products that allow you to not count the 10 payments in your DTI ratio?

    • Scott Schang says:

      Hi Ann,

      The payment can only be ignored if the auto loan is an installment loan. If you have 10 payments left on a lease, the lender would not be able to ignore that payment because you will be required to either buy out, or renew the lease at the end of the 10 months.

  • Ann says:

    Does it make sense to do a credit consolidation pryor to applying for a home loan?

    • Scott Schang says:

      Hi Ann, great questions! It might help to consolidate debt if you do it the right way.

      One of the biggest credit killers is having a credit balance greater than 30% of the high credit limit on revolving credit cards. If you have 10 credit cards with low balances, and you consolidate those debts onto a single credit card, you are most likely going to have a balance greater than 30% on that new card.

      If you have the ability to consolidate that debt and keep the balance at less than 30%, that strategy may work if you are trying to increase your credit scores.

      Another thing to consider is what do you do with the cards that you are paying off. DO NOT cancel credit cards. This will cause your scores to drop significantly for several months. If you do consolidate your revolving debt, keep those paid off cards open.

      By having several revolving credit lines with a zero balance, that could help with your credit scores.

      If you feel like you have work to do on your credit, I would recommend speaking to someone that specializes in credit restoration.

      There are a lot of credit repair type companies out there that are shady, it’s a very predatory industry. I have a friend in the business that I trust.

      If you shoot me an email to scott@findmywayhome.com, I can introduce you to someone that will give you a free consultation, and would be able to get into more detail and share actual examples of how these actions might affect your credit scores.

      Hope this helps?

  • Kathryn Julyan says:

    So is Freddie Mac the best option if loans are currently in deferment ? Thank you for the referral to Katy Parsons. She’s great!

    • Scott Schang says:

      Hi Kathryn,

      Yes, Katy is amazing 🙂 All investors are going to require that you use 1% of the balance if the loan is in deferment or forbearance. You can use any payment, even a $0 as long as the loan is in a repayment status.

      Last week, Fannie Mae adopted the same guidelines as Freddie Mac. Now we have 2 options for helping folks with income based repayment plans!

  • Melvin Polinski says:

    Question. My student loan debt is about 200,000 so obviously 1% is too high for me to get a mortgage(2000). My loans are in deferment right now so the credit report shows 0 so lenders have to use the 1%? At least that is what most lenders are telling me. However, I have documentation showing my income based payment begins July 1 and will be $195. My question is can lenders use that documentation of 195 or not until it shows on my credit report?

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