Student Loan Debt and Mortgage Approval

We talk to folks everyday who have student loan debt and are looking at houses.  Some of these folks have in excess of $100,000 in student loans.  Many of them have IBR (income based repayment), PAYE (Pay as your earn) student loans that are in deferment, or forbearance.  In the not so distant past, Student Loan Debt and Mortgage Approval was not that complicated. 

If we could prove you didn’t have any payments for the next 12 months – we were golden.  That’s changed.

If you are a Veteran, and we can verify that your student loan debt is deferred for at least 12 months from the time of closing, then we do not have to count that debt against you in qualifying.  For everybody else, we WILL be required to count A PAYMENT against you… the trick is knowing which payment is going to count.

IBR Student Loan Debt and Mortgage Approval

IBR is a Student Loan repayment plan with monthly payments that are limited to 15% (10% if you are a new borrower) of your discretionary income.

“To initially qualify for IBR and to continue making income-based payments under this plan, you must have a partial financial hardship.”

Many of the people I talk to forget about the “Must Have A Partial Financial Hardship.”  Why is that important when it comes to Student Loan Debt and Mortgage Approval?  Would you get a little queezy feeling in your stomach if you were loaning $250,000 of YOUR money to someone who already has a PROVEN Financial Hardship?  That’s one of the reasons the mortgage qualifications for Student Loan Debt has gotten tougher!

FHA now says that if you have a Deferred Student Loan payment of ZERO, we must count one half percent (.5%) of the balance as a monthly payment.  So, you have $30,000 in Student Loan Debt, and it’s deferred with a ZERO Payment – we are going to qualify you to buy a house with a $150. debt.

FHA allows us to count a monthly payment, as long as there’s a payment showing on your credit report.  There are some ways to do this – for instance, you can get a letter from the Student Loan Servicer showing what your payments will be when they are out of deferment. 

Many times, the Loan officer will set up a telephone call between you and the Credit Bureau Agency and the Loan Servicer. The Credit Bureau will take down the information on the new payment, and then they will issue an updated report to the Mortgage Company showing the correct amount. 

On that $30,000 Student Loan, I just did a re-payment Estimator that showed that payment could be $120 a month.  If you can get evidence of that lower payment, there is a way for the mortgage company to use it for your Student Loan Debt and Mortgage Approval.

For a USDA Home Loan, you must have a fully amortizing payment. Meaning, an IBR of PAYE loan with payments that change over time will not work.  In the case above, with FHA Mortgage Approval, I simply needed A PAYMENT. With USDA Home Loans I must base your Student Loan Debt and Mortgage Approval on a FIXED payment. 

If I can’t document a fixed student loan payment, then I must do your mortgage approval based upon one half percent (.5%) of the Student Loan Balance to qualify you for a USDA Home Loan in NC.  In our $30,000 example, that means I am counting a $150. student loan payment in your qualifying ratios. 

PAYE Student Loan Debt and Mortgage Approval

The Pay As You Earn Student Loan plan is a repayment plan with monthly payments that are limited to 10 percent of your discretionary income. To initially qualify for the Pay As You Earn plan and to continue to make income-based payments under this plan, you must have a partial financial hardship (and be a new borrower).

PAYE are treated JUST LIKE IBR Student Loan Programs when it comes to Mortgage Approval.  So all of the things above about FHA Loans and Student Loan Debt are the exact same if you are in a PAYE program, have deferred Student Loans because you are still in school – or you are in an IBR Program.  FHA says we must count one half percent (.5%) of the balance if the payments are ZERO and USDA Home Loans require us to count one half percent (.5%) of the Balance if the Student Loans are reflected as ZERO.

Veterans can use the zero payment as long as it’s deferred for at least 12 months from closing.

But what about getting a Conventional Loan With Student Loan Debt?

Conventional Loans NOW only require 3% down payment.  Yes, you need decent credit – but if you have that, in most cases a Conventional loan is cheaper.  We will always do the comparison for you when we are deciding between a FHA Loan and a borrower has better than 660 credit scores.

Additionally, Freddie Mac now offers a program with a non-occupying co-borrower. With the Freddie Mac program, you must make a 5% down payment – however, the co-borrower’s income can make the difference in qualifying for the mortgage.

In North Carolina, we also offer First Time Home Buyer DPAs that can help with the down payment and closing costs for mortgages.

FNMA says:

For all student loans, whether deferred, in forbearance, or in repayment (not deferred), the lender must use the greater of the following to determine the monthly payment to be used as the borrower’s recurring monthly debt obligation:

• One percent (1%) of the outstanding balance; or
• the actual documented payment (documented in the credit report, in documentation obtained from the student loan lender, or in documentation supplied by the borrower).

If the payment currently being made cannot be documented or verified, 1% of the outstanding balance must be used.

Exception: If the actual documented payment is less than 1% of the outstanding balance and it will fully amortize the loan with no payment adjustments, the lender may use the lower, fully-amortizing monthly payment to qualify the borrower.

Freddie Mac says this about Student Loan Debt:

• We are clarifying that Sellers may calculate monthly payments for student loans, revolving accounts and open-end accounts based on a specified percentage of the outstanding balance only when there is no documentation in the Mortgage file indicating the actual monthly payment amount
• We are permitting the exclusion of a monthly payment from the DTI calculation when the Borrower is self-employed and the monthly payment is made by the Borrower’s business, subject to certain conditions.

If you are reading this carefully – you will notice there’s no mention in the Fannie Mae or Freddie Mac guidance that says (for instance) “if this is a graduated payment student loan, we will calculate the DTI based upon the HIGHEST payment amount.”

However, in talking to fellow loan officers across the country, and borrowers who are applying with us, this is an “OVERLAY” that some companies have. 

If you can get a payment on the credit report, and if it DOESN’T SAY IBR, or currently in deferment, etc… and it just reports what your payment actually is – then you should be getting your student loan debt mortgage approval based upon that “actual” payment.

However, all mortgage companies MUST create their own Risk Management Systems (it’s part of the new laws) … and some see folks with Student loan debt that equals tens of thousands of dollars as a potential risk.  That’s why each mortgage company might have different overlays.  Our company has MAJOR heartburn if you have NSFs on the last 2 months Bank Statements.

It’s best to understand what the company looks at when it comes to student loan debt and mortgage approval. Unfortunately, some loan officers will not know what the overlays are for Student Loan Debt because they don’t do that many First Time Home Buyer Loans.

Some loan officers don’t realize, for instance, that because you might have higher DTI ratios, there are Debt waivers you can apply for with a USDA Home Loan.

They might not know that you could add a non-owner occupied co-borrower for a FHA Loan to help with ratios…

Some Loan Officers don’t realize that your mortgage application might be approved through a Freddie Mac automated system – and NOT go through on a Fannie Mae system, because Freddie Mac allows higher ratios.  This is important, and if you talk to a lender who is Fannie Mae approved (and not a Direct Lender through Freddie) it can truly be a hat trick.

I’m not trying to make you a mortgage loan expert – I’m only trying to answer the questions I get about why one loan officer did this – and you can find on the Internet that it might work another way.

The Student Loan Effect: How Debt Impacts Home Ownership for Millennial’s

Freddie Mac’s Insight and Outlook report for September focuses on the challenges faced by three types of student loan borrowers, and how low down payment mortgage loans could help, or not help, make home ownership possible.

I’m including the info below because I am hopeful that SOME of the people who read this will be compelled to contact their Senators and Representatives in Washington.  It’s a Political season – and Student Loan Debt and Mortgage Approvals are something that needs to be looked at.

Why are there NO MORTGAGE PROGRAMS that work with Government Employees (for instance) who are in a Student Loan Forgiveness Program!?!

“The low home ownership rate among millennials is still something of a puzzle—it cannot be explained solely by the increase in student loan debt,” says Sean Becketti, chief economist, Freddie Mac. “However, student debt plays a role—higher balances are associated with a lower probability of home ownership at every level of college and graduate education. And recent data has confirmed that not all student debt is created equal.

Students who attended schools with less-certain educational benefits have not fared well. Borrowers who did not complete their studies have fared worst of all. These groups are likely to continue to affect the pattern of home ownership among millennials.

Moreover, a change just this month in Federal Housing Administration (FHA) policy will make it more difficult for some student loan borrowers to qualify for a mortgage.”

Student Loan Debt Study Highlights

• Is the student debt overhang holding back home ownership among millennials?
 While the home ownership rate has been declining for all age groups, the rate among millennials is particularly low.
• Student debt tripled over the past 10 years, reaching $1.2 trillion in the fourth quarter of 2014. Aggregate student debt expanded for all age groups, however, the balances are concentrated among those under 30 years old and those between 30 and 39 years old.
• Before the crisis, home ownership rates of 27-to-30-year-olds with student loans (evidence of at least some college education) were 2 to 3 percent higher than home ownership rates of those with no student loans. That gap began to close during the recession and reversed in 2011. By 2014, the home ownership rate of borrowers was about one percentage point lower than the rate of non-borrowers.
• Recent findings suggest that it may be useful to think of student loan borrowers as being divided into three groups: successful investors, disappointed earners, and at-risk borrowers.


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 Student Loan Debt and Mortgage Approval. 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!