2021 Guide to Qualifying for a Mortgage with Student Loans

IBR Student Loan Payments with Mortgage

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FHA UPDATE - June 17th, 2021:  FHA Removes 1% Rule

When you have student loans, qualifying for a mortgage can get tricky.

COVID-19 UPDATE:  Federally serviced student loans were put into automatic administrative forbearance until September 30th, 2020 as part of the CARES Act, signed into law on March 27th, 2020.

If your payments were automatically withdrawn from your bank account, that has also been suspended.  If you are trying to qualify for a mortgage and you have an IBR or IDR payment plan, forbearance could present a problem.

If this happens to you, it's not difficult to correct.

Additional Reading: COVID-19 Student Loan forbearance, Will it Hurt My Home Loan Approval?

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In this Article

  • Understanding Income-Based Repayment Plans
  • Student Loan Payment Changes
  • Calculating Your Debt to Income Ratio
  • Student Loan Guideline Snapshot 
  • Why Lenders Get it Wrong

Income-Based Repayment Plans

Your student loan payments may be deferred or in forbearance.  If your loans are deferred, you have no payments due.

When you begin to make payments on your student loans, you may have several options.

You may be making payments on your student loan based on your income.  This is called an Income-Based Repayment (IBR) plan.

IBR plans typically will not cover the principal and interest due, and the loan balance may increase even though you are making payments.

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If your payment is based on a calculation that pays off your loan in full at the end of the loan term, this is an amortized payment.

All underwriting guidelines with all lenders will allow you to use an amortized payment when calculating your debt to income ratio.

IBR plans could also leave you with a $0.00 payment, even though your loan is in repayment status.  Your income is reviewed every year to determine your new payment over the next year.

Student Loan Payment Change History

More and more students are straddled with student loan debt for years after leaving school.

Being chained to student loan debt requires an experienced locksmith to unlock the correct guidelines to get you approved for a home loan.

It's almost a full-time job keeping up with the updates to the underwriting guidelines, and IBR payments seem to send many loan officers into a tailspin of misinformation.

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Student Loan Guideline Changes Since 2015

  • 2 times for Fannie Mae Conventional Loans
  • 3 times for Freddie Mac Conventional Loans (January 2020 most recent)
  • 3 times for FHA Insured Loans (July 2021 most recent)
  • 2 times for VA Guaranteed Loans
  • 2 time for USDA Guaranteed Loans

The first major change to the underwriting guidelines happened when lenders were no longer allowed to ignore deferred payments or loans in forbearance.

The second major change was that you had to apply a payment to any student loan balance.  If the payment reporting on your credit report will not pay off the loan at the end of a fixed term, your payments are not amortized.

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Non-amortized payments became public enemy #1 by Fannie Mae, FHA, and USDA.  In 2015, Freddie Mac guidelines did not allow for deferred payments or loans in forbearance and would allow IBR payments, even if the reported payment is $0.00.

Calculating Your Debt to Income Ratio (DTI)

The entire student loan debacle is being caused by confusion around how your debt to income ratios are calculated.

Your debt to income ratio is calculated as your proposed housing payment (when buying a home) plus your monthly liabilities from your credit report, as a percentage of your gross income.

When using a Fannie Mae or Freddie Mac Conventional loan, the total housing payment plus monthly liabilities cannot exceed 50% of your gross income, or a 50% DTI.

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Borrowers using an FHA mortgage have 2 DTI ratios.  A front-end debt to income ratio is your housing payment as a percentage of your income.  A back-end debt to income ratio includes your monthly liabilities from your credit report.

FHA will allow your housing payment to be as high as 46.99% front-end DTI, and a maximum 56.99% back-end DTI including your debts.

Student loans become confusing when no payment is reported on your credit report, or when your payment is an Income-Based Repayment (IBR) payment.

2021 Student Loan Guidelines Snapshot

FHA Government Insured - Updated June, 2021

  • Non-amortized Payment - Use actual payment from credit report or servicer if over $0.00
  • Amortized Payment - Ok with all lenders
  • Deferred, forbearance, or $0.00 income-based payment use .5% of the loan balance.

Fannie Mae Conventional

  • Income-Based Payment - Allowed - $0 ok with supporting documentation* - Updated April, 2017
  • Amortized Payment - Ok with all lenders
  • Deferred or forbearance use 1% of the loan balance.
  • *Expect to get documentation from your student loan servicer

Freddie Mac Conventional 

  • Income-based payments - May use payment as reported on credit report
  • $0 payment on NO LONGER used - must use .5% - See PSLF Update
  • Can exclude from debt to income calculation if less than 10 months payments left
  • Deferred or forbearance use .5% of loan balance - Effective November 1st, 2018

VA Guaranteed Loan

  • Non-amortized Payment - Allowed, even with $0.00 payment
  • Amortized Payment - Ok with all lenders
  • Deferred or forbearance must use 5% of loan balance divided by 12
  • Expect to get documentation from your student loan servicer

USDA Guaranteed Loan - Updated September 2019

  • Non-amortized Payment - Use payment on credit report 0r .50%, whichever is greater.
  • Amortized Payment - Ok with all lenders
  • Deferred or forbearance use .50% of the loan balance

Why Lenders Get it Wrong

If you're calling from a TV, radio, or internet advertisement, you are most likely to be connected to a call center, with little to no actual mortgage experience.

I call these "big box" lenders.  These lenders are amazing at processing a certain type of loan file that does not require anything too far outside the box.

Student loan payments are not really so far outside the box, but the timing for when these issues are found could not be worse.

If you are working through a big box lender call center, your application is not getting in front of a professional until it reaches the underwriter.

The underwriting guidelines for student loans, and specifically income-based repayment plans, have changed several times over the past 2 to 3 years.

Many times, your file is not in front of the underwriter until after you've already accepted your purchase offer and paid for the appraisal.

Hopefully, there's enough time, and the underwriter is experienced enough to look up the guidelines and can figure out how to save your new home by getting you approved for the right loan.

I wouldn't believe this happens as much as it does if I hadn't experienced it personally!  We first covered this topic in 2015, and have answered hundreds of IBR questions from buyers across the Country.

So many of these horror stories we hear could have been avoided if a professional loan officer was used, and not a call center lender.

Working with an Expert

We have been helping home buyers and homeowners qualify for a mortgage with student loans since 2015 when the major challenges we face today were first introduced.

Find My Way Home is an Expert Network of experienced mortgage professionals, here to answer your questions, and put you on the right path.

You can get your questions answered by either giving us a little more information here, and we will match you with a loan officer who is an expert with student loan guidelines, or you can leave a comment or question below.

We do not sell your information to multiple lenders and hope you find someone experienced, we will introduce you to one loan officer that we know and trust that can help.

Any question that you ask below, I will personally answer, and if needed, we can introduce you to a professional, experienced loan officer that I know can help.

About 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

  • Kee says:

    Hi…I am currently at a 659 Fico per Wells Fargo calculator at a 56% DTI with my current student loan payment for a balance of 76k at 200 per month IBR plan. Mine are in deferment. I am at 59k annual salary on a job 9 years. Trying to qualify for about 250k. I have 10k saved but don’t want to use any for down payment. Is this feasible….thanks in advance for your help.

    • Scott Schang says:

      Hi Makesha, a 56% DTI is too high to qualify for a mortgage, that would be the first thing to look at. Are there any loans that you’ve co-signed for that you can be refinanced off of? You can also pay off (or down) auto loans, or pay off credit cards as options for reducing the debt part of that debt to income ratio.

      Unless you’re a Veteran of the US Armed Forces, or buying in a USDA eligible area, chances are you will have down payment or closing costs that will need to be paid for. There are some assistance programs available in most states that you can look into. You can also get a closing cost credit from your lender, real estate agent, or the seller to help cover closing costs, but not down payment.

      Other common ways to get down payment costs covered is to get a gift from a relative or borrow against your 401k if you have one.

      As far as the IBR payment goes, that shouldn’t be a problem if you are still in the IBR repayment plan but your payments are temporarily paused due to the COVID administrative forbearance.

      There are a few moving parts here, but nothing that I can see that would prevent you from buying a home with a little bit of work.

      If you would like me to introduce you to someone I know and trust to guide you through these options, feel free to email me at scott@findmywayhome.com and let me know what State you’re buying in.

      I hope this helps?

  • Valenz Vallecillo says:

    Credit score in mid 750.
    Dti 35/70 not sure ive had part time jobs in same line of work.main job over two years. And have a landlord who is willing to help with closing costs. 5% down 0n a $100,000

    • Scott Schang says:

      Hi Valenz, part time jobs in the same line of work is not as important as a consistent source of “second job income”. The 70% backend DTI is going to be the biggest challenge, which may be able to be addressed depending on your student loan balances and the type of loan that you’re applying for.

      With a 750 FICO, you can use an income based payment when calculating your debt to income ratios.

      If you would like to speak to a loan officer that has experience with student loan guidelines, feel free to shoot me an email to scott@findmywayhome.com and let me know what State you’re buying in.

      It sounds like you’re in a good position to buy. We’ll just need to address the student loans and review the second job history, if that’s even required.

      Hope this helps?

  • Joe says:

    What’s killing first time homebuyers right now, beyond student loans: First time buyer with say 5% down, 720 credit score, and income worthy finds a home. It’s Appraised value is $300,000, lender approves you for the loan on that house, but then multiple people out bid you and offer $325,000. Lenders won’t allow you to then borrow $325,000 on a home appraised at $300,000 will they? This also assumes one can’t put more money down to cover the difference. How is it even possible to buy a home right now for first time buyers when everyone is overbidding on the appraised value.

    • Scott Schang says:

      You’re right, Joe. This is a really big problem and the first-time buyer price range is where we are seeing the most competition. You’re also correct that the lender will not lend above the “loan to value” based on the appraised value.

      The only option you have as a buyer is to bring in the difference between the appraised value and the purchase price.

      • Joe says:

        Thank you very much Scott, OR…………. ANOTHER SOLUTION…… Time to get busy with my penmanship and write a heartbreaking letter so someone will want to sell to me rather than those that are outbidding, is this correct? Write a letter to the person selling the home? p.s., I just sent you a personal email so you can refer me to someone.

        • Scott Schang says:

          YES! Also consider video 🙂 This is an episode of a podcast I do with some friends of mine, and our guest is a mortgage broker in GA that uses story (video) to get offers accepted. He’s very successful at it!

          It’s a “marketing” podcast, but I think you’ll see that your idea is exactly right – https://youtu.be/cPYamQ9l5sc

          I’m responding to your email now!

          Hope this helps?

  • RCS-MD says:

    My student loans are currently deferred and I want to use an IBR letter and go conventional.. I was told they had to use .50%. Can I take my loans out of deferment and then proceed to use the IBR letter? Any stipulations or issues you see on this?

    • Scott Schang says:

      If your student loans are deferred, then yes, you could use .5% if using Freddie Mac conventional underwriting guidelines. If you are in an income-based repayment plan (IBR), you can use FHA, Fannie Mae, or Freddie Mac underwriting guidelines.

      Not all loan officers know the student loan guidelines, and not all lenders follow the student loan guidelines.

      If you would like an introduction to someone that I know and trust that has experience, feel free to shoot me an email at scott@findmywayhome.com

      I hope this helps?

      • RCS-MD says:

        I was actually wondering if I could pull the student loans from deferment and then submit for the IBR letter, and after that proceed with Fannie or FreddieMac, as I think the IBR, will come back at zero or much less than .50. I was told if because my student loans are currently deferred, even if I get an IBR letter that says zero payment I still have to use .50 anyway, and they would have to be “out” of deferment to use the IBR? I was looking for a work-around.

        • Scott Schang says:

          This is a really good question, and you’re partially on the right track here with your thought process.

          IF your loans were in an IBR repayment plan PRIOR to the COVID inspired Administrative forbearance, then we’ve been successful using that IBR payment, even if still in forbearance.

          IF your loans have been in deferment (not because of COVID), you would have to take your loan out of deferment and be in a repayment status.

          As long as your actual payment is greater than $0.00 – You can use Fannie Mae, Freddie Mac or FHA underwriting guidelines.

          If you IBR payment is $0.00 – Fannie Mae conventional guidelines would be your only option.

          Does this make sense?

          If you have any further questions or would like an introduction to someone experienced with these rules, shoot me an email at scott@findmywayhome.com.

          Hope this helps?

        • Joe says:

          Yes, you can pull them out of deferment. Go online and apply for an INCOME BASED REPAYMENT PLAN. One of the questions it will ask you is if you want to have the plan go into effect now (start paying now) or when the forbearance (covid relief). I just did it myself

  • Joe says:

    Entering into an IBR plan, do underwriters typically want to see a certain # of payments made before they agree to use the amount on your credit report?

    • Scott Schang says:

      Hi Joe, another great question. The underwriting guidelines do not specifically address payment history as a prerequisite to qualifying using your IBR payment.

      As long as you can document your actual payment at the time of application, you should be fine.

      Hope this helps?