When trying to buy a home, it is no secret that student loans cause debt ratio issues. Per a recent Federal Reserve report**, student loan debt is rising at an alarming rate of $2,701 per second! As of January 2017, student loan debt is approximately $1.4 trillion. Obviously this is a wide-spread problem for many borrowers. While we don’t have a solution for this stat, we do have a great option for those with even large amounts of student debt to become homeowners. Over the years many buyers have learned that you cannot use the low income based repayment terms to qualify for a home loan. But, now you can!
What is Income Based Repayment?
Typically, students have a reprieve while in school and short up to 6 months thereafter. This period is called deferred payments, which means no payments are due. Once payments are required, there are usually several options that include fixed payments, graduated payments, and income based repayment. Also called income driven repayment, the repayment terms are based on the borrower’s income. Actually, the payments may be as low as $0! Cool deal, right? Well over the last few years, many prospective home buyers have found that most mortgage guidelines do not care about that low payment. Even though the IBR payment may be $0, lenders have to use 1% of the outstanding student loan balances. That is where debt to income ratio issues happen.
How to Buy a Home with Income Based Repayment Student Loans
As mentioned, we have a solution. But, there are rules. Obviously, the 1% of the balance guideline disqualifies many buyers because it creates a high debt to income ratio. This is especially true when the student loan balances are high.
For example, owing $75,000 would mean a $750 payment (using 1% of the balance). So even if the required student loan payment in this example is only $50, lenders often count $750. Obviously, it is hard for many buyers to qualify with this level of payment among other debts.
However, there is a way to use IBR or reduced payments with the Fannie Mae conventional loan. Not only is this an advantage, also buyers may put down as little as a 3% down payment. Plus, the down payment may be a gift or down payment assistance. By the way, it works for refinancing too! As long as the student loans are NOT in deferment, forbearance, or have a zero payment, this program could be a solution for the potential buyer. Check out the advantages:
Benefits of Fannie Mae Purchase with IBR Student Loans
- As low as 3% down payment
- Down payment may be a gift
- Down payment assistance allowed
- Use the IBR payment to qualify
- Possible reduced mortgage insurance using the Fannie Mae HomeReady program
As mentioned, this option doesn’t apply to all borrowers, but these benefits should sound really good to many. If lenders have said that using the 1% payment calculator is an issue, then talk to one of our loan officers.
The benefits above can help first time buyers overcome a huge roadblock and can assist younger buyers with moving out of their parents’ home.
Additional Mortgage Options for Student Loan Debt
Mortgage guidelines are continually improving to work with buyers and homeowners that have income based repayment loans. There have been enhancements to USDA loans that now only count 1/2% of student loan balances for a payment. Not only that, but USDA loans require no down payment and have very affordable terms. Freddie Mac conventional loans have made improvements to it’s calculations as well. Finally, VA loans have their own way of calculating IBR payments that works out much better than using 1%. Although, FHA still lags behind the other programs by still requiring 1% of student loan balances.
** Consumer Credit (federalreserve.gov). As of January 2017. “The G.19 Statistical Release, “Consumer Credit,” reports outstanding credit extended to individuals for household, family, and other personal expenditures, excluding loans secured by real estate.”