Many times, buyers with student loan debt hear the following mortgage lender response: “Sorry, but when using 1% of your outstanding student loan debt as a payment, your debt to income ratio is too high for a mortgage loan”. Regretfully, even though a buyer may have a low income based repayment student loan payment, FHA requires lenders use 1% of the balance or the fully amortized payment for mortgage qualification. This can be a significant hurdle in qualifying for buying a home. With the new Freddie Mac student loan guidelines, buyers have some great home purchasing loan options!
Student Loan Debt Issues
Early 2018, the U.S. crossed a student loan debt milestone in the worst way. The Federal Reserve reported $1.5 Trillion in student loan debt! That number is just too hard to imagine. But, owing $50,000 or $100,000, maybe more in student loan debt is more of a reality these days. These borrowers fully comprehend these numbers and when it comes to buying a house.
If you figure a 1% payment based on $100,000 in student loan debt, that is a $1,000 qualifying payment. By the way, that is the student loan qualifying payment. We still have to include the new house payment and other debts! It takes a healthy income to qualify in cases like these, which hurts buyer chances. This is especially true for first time home buyers who are typically at the low-income point of their career.
Income Based Repayment Student Loans
Fortunately, for many student loan borrowers, the student loan companies offer very flexible payment options. These include deferment, graduated payment, extended term loans, and income-based repayment (IBR). Mortgage programs treat each scenario a little different from each other. Plus, each mortgage loan program has its own benefits. Income-based repayment student loans often offer a drastically reduced payment based on the borrower’s income level. The required payment may even be as low as $0 per month. Believe it or not, it is not uncommon for someone to owe $50,000 and have an IBR payment of $0 – $50 per month.
So, student loan programs have obviously gotten creative in their payment options. The low payments offer affordability to borrowers who are often starting their new career. Mortgage programs have been slowly becoming more lenient towards income-based repayment student loans.
Luckily, there are some new affordable solutions for these situations that are flexible on debt ratios, but also provide low down payment options. Freddie Mac student loan guidelines now compare more favorably against other lending agencies like FHA or Fannie Mae.
Freddie Mac Student Loan Guidelines
Freddie Mac, short for Federal Home Loan Mortgage Corporation, is a government-sponsored entity which offers a secondary market for lenders to provide affordable home loans to borrowers. At OVM Financial, we take pride in offering Freddie Mac’s great products, but we don’t stop there. We also believe in educating borrowers. Home buyers should understand what they are getting and making an informed decision. Learn more by reading more of our blog articles made for you!
Easier Buyer Qualification
As we discussed many are on income-based repayment programs. Remember, these payment plans are at a much lower payment level. If possible, buyers want to qualify for a house based on these lower numbers because of the lower the debt payments, the lower the qualifying debt to income ratio, the easier to buy a home. In other words, easier buyer qualification.
New Freddie Mac Student Loan Guidelines
- If payment is > $0 – Use the amount listed on credit report or other evidence of payment
OR
- If payment is $0 on credit report – Use .5% of the outstanding balance listed on credit report as payment
Did you catch the sweet spot here? Buyers with student loan payments of $1 or more per month get the biggest benefit. $100,000 balance with a $1 payment, only $1 is counted against the buyer’s debt to income ratio! If the reported payment is $0, even if IBR, .5% must be used. In the same $100,000 but with a $0 required payment, we must count $500 in the debt ratio. $100,000 x .5% = $500.
Freddie Mac Student Loan Guidelines -Deferred Student Loans
Student loans offer deferment periods for various reasons. Deferment means no payment is due. Using our 2nd guideline above, this also means using the .5%. Although, not nearly as beneficial as using the IBR or other payment above $0, it is much better than using 1%. Remember, the FHA student loan guideline is 1% of the outstanding balance. Using the same $100,000 student loan balance: FHA = $1,000, Freddie Mac = $500. An extra $500 per month goes a long way in qualifying for a home loan! Of course, option 1 goes a whole lot further!
Freddie Mac Low Down Payment Options
You may be thinking, “Now I will have a lower debt ratio to qualify, but, I still can’t come up with a 20% down payment.”. Hold the phone because that is a common misconception! Conforming loans offer as low as a 3% down payment. Additionally, the down payment may be a gift or sometimes even borrowed!
Freddie Mac Home Possible Benefits
Home Possible is an affordable lending product offering the combination of flexible guidelines and lower mortgage insurance premiums. This equals potentially lower monthly payments and down payment along with the ability to qualify easier. Primary benefits include:
- 640 minimum credit score
- Fixed interest rates for up to 30 years
- Lower than traditional mortgage insurance
- Flexible income limits
- Allows the Freddie Mac student loan guidelines discussed
- Often lower mortgage insurance than FHA
Most of the above have obvious benefits such as lower credit score and fixed rates. However, what does lower mortgage insurance mean? For the most part, loans with less than 20% down payment or equity require some form of mortgage insurance. Mortgage insurance or PMI (private mortgage insurance) protects the lender in case of loss through foreclosure. Yet, it benefits the borrower because it allows for less than 20% down payment.
How Mortgage Insurance Works
On low down payment conventional loans, there is a schedule of mortgage insurance. Generally, it is the highest expense with the lowest down payment. Then, as the down payment increases at 5% intervals, the PMI percentage decreases. So, 15% down payment is a lower PMI than 5% down. Make sense? Home Possible allows as little as 3% down payment and the mortgage insurance premium is lower than the 5% option. I know, we just said that the lower the down payment, the higher the PMI. That is where the value lies within this program! It allows a lower down payment and then gives a break on the level of mortgage insurance.
To learn more about Home Possible income limits, property eligibility, down payment sources, check out our Home Possible article.
Contact a loan expert with OVM Financial to discuss strategies to purchase a home, even with student loan debt. Even though we discuss Freddie Mac student loan guidelines here, there are other options we will explore. For instance, Fannie Mae student loan guidelines offer even better options for borrowers in certain circumstances. Plus, Veterans have great solutions through little known VA loan guidelines. So, let’s talk!