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Student Loan Forgiveness Exception for Homebuyers

How to Qualify for a Mortgage With Student Loan Forgiveness

Student Loan Forgiveness

Student loan forgiveness is an incentive that is offered by some employers, and more commonly, if your employer makes you eligible for the Public Service Loan Forgiveness (PSLF) program offered by the Federal Government.

With the cost of higher learning growing, so is the amount of student loan debt burdening homeowners and potential homebuyers.

As student loan debt climbs, so does the need to negotiate a payment plan that better reflects your current income and expenses.  This is especially true if you are currently eligible for PSLF.

Student Loan Guideline Changes

Prior to June 2015, student loans did not present nearly as many problems as they have since that date.  What happened?

While it may be an oversimplified explanation, in short, new rules were created for all federally backed loans to specifically address the future “unknown” or “variable” status of some student loan repayment plans.

Federally backed mortgages include Conventional loans that follow Fannie Mae or Freddie Mac underwriting guidelines, FHA, VA, and USDA mortgage loans.

After June 2015, any student loan repayment plan other than a fully amortized repayment plan that will pay the loan in full at the end of the loan term is going to be treated differently, depending on the type of mortgage you are trying to qualify for.

Student loans that are deferred, in forbearance, or on an income influenced repayment plan like IBR, IDR, PAYE, REPAYE and Graduated payment plans are now subject to wildly different outcomes depending on what type of mortgage loan you use and the experience of your loan officer.

Why Do So Many Lenders Get it Wrong?

In our 2020 Guide to Qualifying for a Mortgage with Student Loans, you’ll read hundreds of stories from readers of this website about inexperienced loan officers and lenders that get it wrong.

It’s heartbreaking to think that the folks that found us are just a small sample of what is probably a much bigger number of people that believed the loan officer when they said no, giving up on the dream of homeownership or a lower interest rate.

The simple fact of the matter is that there are different rules for qualifying for a mortgage with student loans depending on what kind of loan you’re applying for, and what kind of payment plan you have.

Your qualifying options are often limited to the experience of the loan officer that you’re talking to. So, the next logical question is, how do you avoid having your options limited?

If you called your lender from an online internet ad, TV or radio commercial, then you are more often than not speaking to someone in a call center with little to no actual experience looking up underwriting guidelines.

Expert Introduction

We have a network of professional loan officers that have student loan guideline experience available to help.  You can click on any of the links, or get introduced to an expert here.

You will be asked for more information about you and your goals, and we’ll introduce you to someone licensed in your state that we know and trust, and can help.

This is available if you need it.  Let’s get back to the important stuff.

2020 Freddie Mac Student Loan Guidelines

If you’re very new to this and just getting started, what we are really talking about is how an underwriter is going to treat your student loans when qualifying you for a mortgage.  Specifically, the way the underwriter will calculate your DTI (debt to income) ratio.

Your student loan payment, as calculated by the underwriter, will be considered as debt and will impact the maximum mortgage payment you qualify for.

The guidelines we are covering in this article would apply for a conventional mortgage that follows Freddie Mac underwriting guidelines.

When your student loans are in repayment, deferment, or forbearance, your “qualifying” payment is calculated as follows:

  • If your monthly payment amount is greater than zero ($0.00), using Freddie Mac underwriting guidelines, the underwriter must use the monthly payment amount reported on the credit report or a statement from your student loan servicer, or
  • If the monthly payment amount reported on the credit report is zero ($0.00), use 0.5% of the outstanding student loan balance, as reported on the credit report.

DTI Calculation Example: $0.00 Payment

If you have a $97,000 student loan balance on your credit report, and the loan is in deferment so the payment is zero ($0.00), the calculation is as follows:

  • $0.00 payment = .5% calculation
  • $97,000 x .5% = $485
  • When calculating your debt to income ratio, $485 is used as a debt.

DTI Calculation Example: $1.00 Payment or More

If you have a $97,000 student loan balance on your credit report, and the loan is in deferment so the payment is one dollar ($1.00), the calculation would be as follows:

  • $1.00 payment = $1.00 used for debt when calculating your debt to income ratio.

You must also receive an LPA Accept decision through the automated underwriting system, and send supporting documentation from your student loan servicer, if necessary for your loan file.

If you want to explore student loan qualifying guidelines for Fannie Mae Conventional, FHA, VA or USDA see our 2020 Guide to Qualifying for a Mortgage with Student Loans.

NEW: Student Loan Forgiveness Exceptions

With this underwriting guideline update, Freddie Mac is making a bold step as the first guidance that accounts for employment contingent student loan forgiveness.

This new exception allows you to exclude your monthly student loan payment from the DTI (debt to income) ratio if:

  • Your student loan has 10 or less monthly payments remaining until the full balance is forgiven, canceled, discharged or paid by an employment-contingent repayment program, or
  • The monthly payment of the student loan is deferred or in forbearance and the full balance will be forgiven, canceled, discharged or paid by an employment-contingent repayment program at the end of the deferment or forbearance period

Your lender will be required to document that you currently meet the requirements for the student loan forgiveness, cancelation, discharge, or employment-contingent repayment program. 

If you are unsure about what kind of payment plan you have, or if you are eligible for PSLF, you can speak to a trained student loan consultant to make sure you’re in the right loan to put you in the best position to qualify for a mortgage.

Additional Help

Freddie Mac will allow the monthly student loan payment to be excluded from the DTI ratio as stated above, as long as you can provide documentation indicating that you are eligible or approved for the student loan forgiveness, cancelation, discharge or employment-contingent repayment program.

Evidence of eligibility or approval must come from the student loan program or the employer, as applicable. 

If you need help establishing the right repayment for a PSLF program, or if you need help applying and remaining eligible for PSLF, take a look at a partner of ours, LoanSense.

LoanSense has student loan repayment counselors that will help you explore your options and help point you in the right direction.  Whether you are trying to qualify for a mortgage or not, we highly recommend you see what LoanSense has to offer.

Video: Can Student Loan Payments Be Restructured to Qualify for a Mortgage?

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 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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