I’ve been asked recently about the difference between Student Loans that are Deferred, and Student Loans in Forbearance and Mortgage the Approval process.
Both student loan deferments and student loan “forbearance’s” give you a break from monthly payments for a set period of time.
There are situations where you might need a Forbearance, because you’ve gotten behind with payments, and just can’t get caught up any other way.
Those situations will likely make it difficult to get a mortgage.
However, if you receive Forbearance because you qualify as a Member of the Military (for instance) then we will likely be able to help you get a mortgage and buy a house.
It will depend on the REASON you are in the Forbearance Program.
In general, forbearance is available if you work an internship, perform certain types of community service, or find yourself experiencing financial hardship, you may be qualified to postpone payments with forbearance.
All loans accrue interest during forbearance, so it’s smart to pay at least the monthly interest on your Student Loans during this period to avoid interest capitalization.
Forbearance resolves any delinquency on the student loan account. Those delinquencies are what keeps most folks who are in a Forbearance Program with Student Loans out of the “Home Buying” approval process.
Deferred Student Loans and Mortgage Approval
There are four different types of Mortgage Loans. Deferred Student Loans are treated slightly different based upon the type of mortgage you are applying for.
Folks who are applying for a mortgage with a Deferred Student Loan are normally in a program that allows them to delay making payments until they’ve reached certain income levels, or had sufficient time out of college to establish themselves.
READ – they did not start making payments, and THEN got behind.
Conventional Loans and Deferred Student Loans
When a payment CAN be established, and it’s a FIXED RATE student loan payment – then we can use that amount in your debt ratios, just like any other debt.
If the actual student loan payment is an IBR or PAYE loan, where the payments can vary – then we must look at them differently.
If the payments can change – The Bank must use the greater of the 1% calculation or the actual documented payment for a Fannie Mae loan. Freddie Mac will allow us to consider the payments that are reflected on the credit report.
Bottomline: If the Deferred Student loan is an IBR or PAYE Status, with payments that will change over time – Conventional FANNIE MAE Lenders will be required to consider 1% of the Balance. For those who are making a payment, Freddie Mac will allow us to consider the payment on the credit report.
FHA Mortgages and Deferred Student Loans
The NEW FHA Guidelines state that if the ACTUAL Deferred Student Loan payment is $00.00 then we are required to count 1% of the Balance as a payment amount!
If the ACTUAL Payments are not equal amounts, meaning they are Income based, or PAYE – we must count 1% of the balance.
Bottomline: If the Deferred Student loan is an IBR (for instance) we have to count a 1%.
VA Home Loans and Deferred Student Loans
This is the trickiest of all questions.
What the Veteran’s Home Loan Handbook says, and what some BANKS are doing with the Underwriting Guidelines on a VA Loan can be completely different things.
The VA Home Loan Deferred Student Loan guidance is as follows:
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 time frame, the debt need not be considered in the analysis.
So, theoretically – if you can prove, for instance, that your Deferred Student Loan Debt has a payment of $00.00 for more than 12 months, we don’t count it.
However – many Banks are beginning to follow the FHA Guidelines for VA Loans. This is happening, in our opinion because most VA Loan Underwriters are also FHA Underwriters.
USDA Home Loans and Deferred Student Loans
USDA Loan guidelines changed in December of 2014 with the publication of Administrative Notice 4543.
Any student loan whether it is in repayment or deferred must be included in the qualifying calculations.
This means that if you have 6 payments or more left on a student loan – we will calculate that payment in qualifying you for a mortgage loan.
If you do have student loans that are in deferred status we must establish how much the monthly payment will be once the loan is back in repayment status.
We ALSO must confirm that the loan is a FIXED RATE payment plan, because IBR and PAYE loan payments are not allowed with USDA Home Loans. IBR and PAYE payments of $0 are not eligible to be used in the debt ratio. If your student loan debt is $00.00 each month, we are going to use 1% of the balance.
Across the “Internet” you might be reading something that says if your IBR payment can be established, we can use 1% of the Balance or $100 payment. That is outdated information.
I know all of this is written in absolutes, and if the tone of this is harsh – I apologize.
There are HUNDREDS of people buying a home in NC TODAY who have student loans.
Some of them are adding parents to the loan, so that their debt to income ratio is not as bad. This is a great option – the only catch is that yo will not likely still qualify for a no down payment mortgage. You can get a gift – so now you are asking your family for the down payment, and to be on the mortgage with you… but that is a viable way to buy a house.
If you have questions about Student Loans in Forbearance and Mortgage Approval, you’re in luck! That’s where we come in – we help SOOO many folks who have various types of deferred student loans in NC, we know what WILL work, and what won’t. Please call Steve and Eleanor Thorne 919 649 5058. We work with First Time Home Buyers everyday, and we would love to be the mortgage lender you choose to help you buy your house!