Now, let’s shed light on the recent decisions by loan agencies regarding IBR loans in the loan qualification process:
Fannie Mae Conventional Mortgage
They’re alright with IBR payments. Their guidelines insist that you document repayment status with a credit report or loan statement. Even if your payment is $0, they’ll take it. Just remember to have documentation proving it’s zero.
Freddie Mac Conventional Mortgage
They’re flexible regarding IBR payments, but the Freddie Mac student loan guidelines are specific. If your monthly IBR payment is not reported on your credit report or is listed as deferred or in forbearance, Freddie Mac requires additional documentation to verify the monthly payment amount for calculating your debt-to-income ratio.
Suppose no monthly payment is reported on a deferred or forbearance student loan, and no documentation in your mortgage file indicates the proposed monthly payment. In that case, 1% of the outstanding loan balance will be assumed as the monthly amount for qualifying purposes.
How can you provide this proof?
Documentation could include a direct verification from the creditor, a copy of your loan agreement, or the projected payment required once deferment or forbearance ends, as shown in your loan certification or agreement.
Related: Do Deferred Student Loans Affect Getting a Mortgage?
Despite no changes in Freddie Mac’s seller guide, we’ve received direct confirmation from them: They will consider your IBR payment when determining your debt-to-income ratio. So, if your IBR payment is $0, 0.5% of your outstanding loan balance, as reported on your credit report, will be used for DTI calculations.
The FHA rules have changed as per Mortgagee Letter 2021-13. The new FHA student loan guidelines now require including all student loans in the borrower’s liabilities, irrespective of the payment type or status.
If the payment used for the monthly obligation is less than the monthly payment reported on the borrower’s credit report, the mortgagee must obtain written documentation of the actual monthly payment, payment status, outstanding balance, and terms from the creditor or student loan servicer.
When calculating the monthly obligation for outstanding student loans, the mortgagee must use:
The payment amount reported on the credit report or the actual documented payment when the payment amount is above zero
0.5 percent of the outstanding loan balance when the monthly payment reported on the borrower’s credit report is zero
The VA requires lenders to use the loan payment amount on your credit report for your DTI. But if that payment falls below a certain threshold, you’ll need to provide a statement from your student loan servicer detailing the actual loan terms. The threshold is calculated by taking 5% of the outstanding loan balance and dividing it by 12.
Sorry, no IBR payment with USDA. Their rule book specifies your payment must be fully amortized or use 0.50% of the outstanding loan balance as shown on your credit report or the current documented payment under a repayment plan approved by the Department of Education.
In light of the recent proposal from President Biden’s administration, these rules could see some changes soon. The new income-based repayment plan proposes to cap monthly payments at 5% of your income for undergraduate loans, which would further impact your DTI calculations.