COVID-19 Student Loan Forbearance, Will it Hurt My Home Loan Approval?
What We Know Now
Student loan forbearance is not ideal if you’re trying to qualify for a home mortgage loan. If your student loans are in forbearance or deferred, you must use 1% of the student loan balance when calculating your debt to income ratio.
Qualifying for a mortgage with IBR student loans is a topic we’ve been covering since major changes in 2015 made it more challenging to qualify.
When the CARES Act was signed into law on March 27th, we could see the writing on the wall for anyone trying to qualify for a home mortgage loan with IBR or IDR student loan repayment plans.
It’s too early to know for sure how student loan forbearance is going to impact homebuyers and homeowners, but it’s not too early to start talking about it.
Administrative Student Loan Forbearance
The coronavirus COVID-19 pandemic is hitting everyone hard. The Government is on overdrive offering payment relief and protection from negative credit reporting during these challenging times.
The following announcement is prominently displayed on the home page of the Federal Student Aid website, which is an Office of the Department of Education.
Your payments will automatically stop from March 13, 2020, through Sept. 30, 2020.
To provide relief to student loan borrowers during the COVID-19 national emergency, federal student loan borrowers are automatically being placed in an administrative forbearance, which allows you to temporarily stop making your monthly loan payment.
This suspension of payments will last until Sept. 30, 2020, but you can still make payments if you choose.
1% Rule While in Forbearance?
If you are trying to qualify for a mortgage, administrative forbearance could cause challenges.
As of the writing of this article, we still do not know if Fannie Mae or Freddie Mac are going to specifically address this, but until they do, we can only guess.
Unless there is specific guidance that addresses this forced forbearance, we are going to explore how I can anticipate arguing your case to an underwriter.
If your Federal student loans are on an IBR (income based) or IDR (income driven) repayment plans, it is important that you “opt-out” of the forbearance plan and continue to make your payments manually.
If the underwriter sees on your credit report that your loans are in forbearance, they are going to use 1% of your student loan balance to calculate your DTI (debt to income ratio).
Here’s an example of how this might work:
- $100,000 student loan balance
- $0 IBR payment
- You can use $0 payment when calculating DTI
- $100,000 student loan balance
- $0 IBR payment
- Must use 1% of balance – $1,000 payment when calculating DTI
You can see where this might present a challenge? If you are able to opt-out of forbearance so it’s not reported on your credit, that’s a best-case scenario.
If you are unable to keep forbearance off your credit report, continue to make all of your payments on-time and verify that your payments are being recorded properly with the student loan lender.
Hopefully, all of this is a temporary inconvenience, but it’s better to be prepared and get in front of this if you can. Nobody likes surprises!
Continue Making Your Payments
During the administrative student loan forbearance from March 13th to September 30th, 2020 all auto-debit payments are suspended. If you’re distracted with everything else going on in the world right now, you might miss that payments are not being taken from your bank account.
If you don’t want an administrative student loan forbearance and want to continue making payments, you can make manual payments, or contact your loan servicer to opt-out of the administrative forbearance, and your auto-debit payments will resume.
Visit your loan servicer’s website to make a payment, or contact your loan servicer for more information.
Mortgage Forbearance Warning
If you are also a homeowner, forbearance is going to be a little different. You may have heard that forbearance is available to skip payments? You have to be very careful.
We’re not going to go into detail about mortgage forbearance here, but it’s worth doing more homework, and absolutely take the time to understand what options are available as reinstatement options.
Find My Way Home has launched a public resource for all homeowners at ForbearanceReport.com
This site is a collaborative resource for consumers to get common Q&A, links to servicer COVID-19 coronavirus information, and the ability to consult experts that have volunteered to help answer questions and help you to understand the terms that you are being asked to agree to.
Experienced & Expert Advice
Mortgage forbearance, deferment, and mortgage payment relief options are terms that are a part of many homeowner conversations today as we navigate the fallout from the COVID-19 pandemic.
FindMyWayHome has been a resource for both homeowners and homebuyers that have experienced financial hardship since the great real estate crash of 2008.
This website was built by independent mortgage brokers. My partner and I have been in the mortgage business for over 20 years each. We maintain this website to give consumers an opportunity to avoid high-pressure salespeople and get expert advice anonymously.
We published “When Can I Qualify for a Mortgage After Bankruptcy, Short Sale, Foreclosure or DIL” in February 2011, and have been helping folks get back on the path to homeownership after a significant financial hardship ever since. We have answered more than 2,300 questions from homeowners and homebuyers on that one article alone!
For over 10 years now, we have been helping people make more informed and educated decisions about homeownership, and if you find yourself in a challenging place, we’re here to help you recover as quickly as possible and get back on the path to homeownership.
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