You’ve paid down your debt. Raised your credit score Started investing in your 401k. Got your passport. Traveled. Met someone you want to build a life with. Now you want to buy a home. But there’s one thing: your damn student loans.
You’ve had them for a few years. You’ve made payments. But, if you’re being real with yourself, you don’t see how you’re ever going to pay them off.
Still, you want to buy a home.
Enter Freddie Mac.
In this post, I’ll explain how Freddie Mac can help you get a mortgage even though you have a ton of student loan debt.
Let’s get to it.
What is Freddie Mac
For the purposes of this article, what you need to know is this:
Freddie Mac isn’t your lender.
You won’t apply directly to Freddie Mac for a mortgage.
Freddie Mac is a government-owned business that buys mortgages that meet Freddie Mac’s underwriting guidelines from mortgage lenders like the bank you’ve been dealing with. From there, they bundle your mortgage with other mortgages into government-backed securities that they sell to investors.
Why does Freddie Mac do this?
They do it to add stability and affordability to mortgages across the United States by freeing up a lender from having to hold on to its 30-year mortgages.
You see, if your lender had to hold onto all its mortgages it would have less money to lend to new borrowers.
You can read more about Freddie Mac here.
Freddie Mac Guidelines for Student Loans
For student loans in repayment, grace period, deferment or forbearance, Freddie Mac will use either:
- the monthly payment amount reported on your credit report if that amount is greater than $0; or
- 0.5% of the outstanding balance of your student loans if the monthly payment amount on your credit report is $0.
So what does that mean if you have huge student loan debt and are looking to buy a home?
It means you can buy a home.
One of my clients just went through this.
She owes $450 thousand in federal student loans. The monthly payment reported on her credit report for the Income-Based Repayment plan is $750.
If she were to use 0.5% of her $450 thousand balance, her monthly payment would be $2250!
As you can see, if you have a high student loan balance and are looking to buy a home, you absolutely don’t want a $0 payment for your student loans.
Freddie Mac & buying a home while seeking PSLF
Freddie Mac has special rules for your student loan debt that’s going to be forgiven under the Public Service Loan Forgiveness program.
For those of you that are less than a year away from getting your loans forgiven, Freddie Mac will exclude your loan payments from your DTI if you:
- have 10 or less monthly payments remaining until your loans are forgiven and
- meet the requirements for forgiveness under the PSLF program.
Freddie Mac Debt to Income Ratio Guidelines
In general, Freddie Mac looks for your debt-to-income ratio to be not more than 33% to 36% of your stable monthly income.
Stable monthly income is your verified gross monthly income from all acceptable and verifiable sources that can reasonably be expected to continue for at least the next 3 years.
In some circumstances, your DTI can be up to 45%. (And even 50% in limited situations.)
In those cases, a justification for the higher qualifying ratio must be provided.
Buying a home when you have a lot of student debt seems impossible. But it’s not. You just need to understand how the underwriting guidelines work for the financing option you’re choosing.
I help borrowers do this all the time.
Let’s talk if you’d like my help.