Mortgage Requirements With Deferred Student Loans

We’ve written many times about Student Loan Debt and the difficulty it causes for many home buyers in North Carolina (and across the country) to qualify for a mortgage.  Many folks who are buying their first home have Student Loan Debt, but because they are not currently required to make a payment, they don’t consider it in their budget process. Mortgage requirements with deferred student loans DEFINITELY consider those “future” payments and the impact they could make on your ability to pay your mortgage when you go to qualify for a home loan.

Mortgage Requirements With Deferred Student Loans

Mortgage qualifying guidelines do not vary from lender to lender.  Mortgage Lenders don’t arbitrarily make up their own rules….we all have to comply with the same guidelines set forth by Fannie Mae, Freddie Mac, FHA, VA, and USDA.The reason you may hear different guidelines is that many loan officers don’t focus their work on First Time Home Buyers (like we do) and, therefore, don’t actually know what the current guidelines are…..so they give out wrong or outdated advice.  If you find that hard to believe, check out the more than 400 comments on this post we did about IBR Payments and Buying a Home.

Conventional Financing and Deferred Student Loans

Future repayment of all deferred student loan debt on Conventional and My Community financing (Fannie Mae/Freddie Mac) programs must be counted into the Debt To Income (DTI) ratios.

What Payment Amount is Used for Qualifying DTI with a Fannie Mae and Freddie Mac Loan?

If no monthly payment is reporting on the credit report, and you cannot document what the repayment amount will be with a letter, lenders must use a minimum 1% of the student loan as the repayment amount.  

Is 1% the ONLY Payment Option Available for Qualifying for a Mortgage?

NO!  Effective May 1, 2017 Fannie Mae updated their Mortgage Requirements with Deferred Student Loans.  Previously, Fannie Mae required any student loan with a variable payment to be considered ineligible, and Fannie required us to count 1% of the outstanding balance as the monthly payment.  So, if you had $120,000 in Student Loan Debt, even if you were only required to pay $245 a month, we had to consider a student loan payment of $1200 in the ratios!

Most of the Student Loan Debt payments are based upon an Income Based Repayment Plan (or IBR) and have a deferred payment of ZERO reporting on the Credit Report.

Effective with this new Fannie Mae change (which mirrors the stance that Freddie has always had) we CAN consider a variable payment.

Here’s what you will need to do to meet the new Mortgage requirements with deferred student loans:

• Contact your Servicer and establish the lowest NOT ZERO payment you can negotiate.
• Send us (your Loan Officer) the letter from the Servicer establishing what the payment is.
• Make certain you make all payments require in your new agreement.

While we are NOT Student Loan Servicers, we understand that most companies will allow you to go BACK into a deferred status AFTER closing.  Please ask about this when you are renegotiating your payments.  Additionally, it is very important to remember that your credit report will be pulled immediately before closing, so making any agreed payment arrangements is critical.  If an updated report is done, and there’s a missed payment – it could cause you to be turned down for your mortgage!  Yikes!

BEST NEWS ABOUT THE FANNIE MAE STUDENT LOAN GUIDELINE CHANGE

Many of the Down Payment Assistance programs available across the country are only offered through Fannie Mae Servicers.  These new Mortgage requirements with deferred student loans guidelines mean that you CAN qualify for a Down Payment Grant!  The North Carolina Housing Finance Agency programs currently have a very hard 41% overall DTI.  This can be difficult to meet, even for those with IBR payments, but it is possible.  We understand that this will go back to the “normal” Fannie Mae 45% DTI later this year.

How Do You Apply For A Down Payment Grant?

You have to contact a qualified Lender (we are definitely on that list with NCHFA, so dial 919 649 5058) and complete a mortgage loan application.  You can do that on this site (see the green button on the right?), or you can call us, or you can come in.  That part doesn’t matter.

Once we have the information from the loan application we are going to look for the following:

• Do you go over the maximum income limit for the WHOLE STATE of $87,500 for the Applicant. USDA Home Loans, which have no down payment options, have an income ceiling too, which in some cases are higher than $87,500, based upon the HOUSEHOLD income. With the First Time Home Buyer Grant program, we are only looking at the folks who are on the application.This usually makes it easier to qualify for!
• Do you have a minimum credit score of at least 640. This is based upon the MIDDLE credit score – so if you had 3 scores that looked like 622, 641, 649 you would be golden, because at least 2 of them are over the 640 benchmark.
• Have you been renting, living with parents, in school for at least the past 36 months.  We’ve made loans to folks who owned a property in Ohio that they moved out of, and have been renting in NC for 3-5 years. They qualified for the First Time Home Buyer Grants.

After we determine that you meet these basic qualifications for the First Time Home Buyer Grants, we will determine which mortgage program that’s offered works best for you, and how much grant you qualify for.

A different 3% down payment Fannie Mae program offers the opportunity to use Roommate Income to qualify with Ratios up to 50% DTI!  Freddie Mac loans have a very low 3% down payment requirement and they will allow us to qualify someone up to 50% DTI, as well.

Government Backed Home Loans and Deferred Student Loans

Government insured FHA mortgages, require either 1% of the balance be used to qualify, or they require a fixed payment.  Graduated or an Income Based Repayment (IBR) schedule will result in us having to calculate the payment at 1% of the balance.

As of September 23, 2019 USDA Home Loan Underwriters are looking for the following:

• • Fixed payment loans: A permanent amortized, fixed payment may be used in the debt ratio when the lender retains documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed.
  • Non-Fixed payment loans: Payments for deferred loans, Income Based Repayment (IBR), Graduated, Adjustable, and other types of repayment agreements which are not fixed cannot be used in the total debt ratio calculation. The higher of one half percent (.50%) of the loan balance or the actual payment reflected on the credit report must be used as the monthly payment in the underwriter decision. No additional documentation is required.

VA Home Loans allow the Veteran to qualify with payments in deferment with a ZERO payment due showing on the credit report.  In the case of Veteran Home Loans we will omit student loan repayment amounts from your DTI ratio if you can document the student loan debt is or will be deferred for a minimum of 12 months after the time your mortgage loan funds.

Be careful though.  You need to make sure you can defer your student loan and that you don’t defer it too early, which would cause it to be deferred for less than 12 months from when your loan funds.

Buying a house is an exciting decision!  Yes, getting all of this information straight is difficult – but I will answer your questions below as best as I possibly can, so feel free to ask me about Mortgage requirements with deferred student loans and. If you are looking for a home in NC, please call Steve and Eleanor Thorne at 919 649 5058 and we will talk with you about your specific situation.  We’re here to help!