Was your home loan denied because of your income-based repayment plan?

Home Loan Denied Because of IBR Student Loans?

Quicken and New American Denied Home Loan Because of IBR Student Loans.

So Marcus asks a question. He was reading our article based on how to qualify for a mortgage with when you have IBR or student loans, your student loans are in an income-based repayment status.

Now Marcus writes and says that he recently applied to the big box lenders as you called them, a Quicken and New American. Yes, I call those big box lenders.

The way that a lot of these companies are set up is they spend a ton of money on advertising and they hire inexperienced people to sit in cubicles and answer phones, so the chances of them understanding these guidelines are next to nothing.

The biggest problem I have with these big box lenders is they tell folks NO when the answer is not NO, the answer is yes. They just don’t know what they’re talking about.

So Marcus’ particular situation, they have an income-based repayment plan, IBR payment plan, and their payment is zero. They have 700 credit scores and they’re looking to buy a house, but they were turned down because the big box lender does not know how to calculate the debt to income ratios when you have a zero income-based repayment.

Now Marcus, a couple of things could be going on here. The first thing that could be going on is they could be looking at FHA guidelines. If they don’t know the underwriting guidelines at all if they don’t understand student loan guidelines at all, they could be looking at an FHA loan, in which case zero payment is not allowed.

They’re going to require use 1% of the balance and based on what your balances are, I could see where that would throw your debt to income ratio is completely out of whack and you would have challenges with that, but you can use a zero payment, a $0 payment on an IBR payment or income-based repayment plan using either Freddie Mac or Fannie Mae guidelines using a conventional loan.

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So that’s the answer. The answer is yes, you can use a conventional loan, Fannie Mae guidelines are going to be the easiest because Fannie Mae actually specifically states in there that if you are in an income-based repayment plan and the payment is zero, as long as you can produce documentation to prove that the loan is in repayment and not defer it or in forbearance, then you can absolutely use that as zero payment.

Freddie Mac’s as a little bit differently because Freddie Mac simply does not address, does not address a zero payment specifically, but it does say that as long as it’s in an income-based repayment status, you can use the payment that’s reporting on the credit report and I have lots of experience with this.

We have done Freddie Mac guidelines with a zero payment and so that should not be any challenges. Now I don’t know any of the other details of your qualifying criteria for qualifying for a conventional loan in any, with any of the other qualifying criteria, but the student loan payments, this $0 payment on your income based repayment should not prevent you from qualifying for a conventional loan using Fannie Mae or Freddie Mac underwriting guidelines.

So Marcus, thank you for finding us. Thank you for not taking no for an answer as an answer from one of these big box lenders like Quicken or new American or any other number of lenders out there that really don’t, they’re not good at doing the hard stuff just because they don’t hire really experienced loan officers.

It’s just not their business model. So thanks for your question. I hope this helps because you absolutely have options. The answer is not, no. The answer is we need to look at those two programs and see if we can fit you into one of those programs.

So thank you for your question here. I really hope that you were able to connect with somebody. I believe I introduced you to somebody through the website that I know that has experienced with these guidelines and that can point you in the right direction.

So again, thanks for your question and I hope this helps?

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • MV says:

    Now that IBR federal student loans are automatically put in administrative forbearance for 6 months due to COVID-19, how would this impact one’s ability to use $0 payments when using Freddie Mac or Fannie Mae guidelines?

    • Scott Schang says:

      Hi MV, you read my mind! I’ve been worrying about this question for the past 2 weeks. If your student loans report as in forbearance on your credit report, I think this is going to be a problem.

      It really just depends on what your timeline is. Nothing is really “known” yet about how this is going to work, and your student loans in forbearance may just be an unintended consequence of good intentions. I mean, who doesn’t want to skip payments, right?

      There are going to be many, many situations like yours as we navigate this pandemic. Time is going to solve all challenges.

      I guess what I’m saying is “it depends” on whether or not it’s reporting, and definitely the experience of the loan officer you’re working with to know how to tiptoe through this particular issue.

      I have a network of friends across the country that are experts at IBR guidelines. If you are trying to qualify for a Fannie or Freddie mortgage now, I can make an introduction to someone I know and trust that will give you the best opportunity to get this done.

      If you would like an introduction, shoot me an email to scott@findmywayhome.com and let me know what State you’re in.

      Hope you stay safe out there. I hope this helps?

      • Rebecca says:

        I have an IBR with zero payment, and all of the Executive Orders from President Trump say that you will still be reported as paying on time during the COVID Forbearance if you have an IBR. I log in to my Fed Loan Services (loan servicer) and all my loans show current and no payment due. I also do not have to recertify my IBR until Jan. 1, 2021. I have the letters notifying me of all this in my documents tab, as well. NOTE: this is if you have all government loans.

        • Scott Schang says:

          Hi Rebecca, yes, that’s accurate. It should be reported as on-time during the administrative forbearance from COVID-19. Your lender should be ok with this. If they are not, shoot me an email to scott@findmywayhome.com and I can connect you to someone that is very experienced with these guidelines.

          Hope this helps?