You may have heard of Fannie Mae and Freddie Mac. These are government-sponsored enterprises (GSE) which securitize your basic conventional mortgages. Despite their many similarities, their guidance on how to qualify a borrower with student loans differ significantly. Now, in addition to conventional GSE’s, there are also Government loan options such as FHA, Rural Housing and VA loans, which also offer different stances on how to qualify borrowers with outstanding student loans. The repayment status of a buyer’s student loan and the mortgage program selected will greatly affect how much the buyer qualifies for.
Income Based Repayment
If a student loan is being repaid under an income based repayment plan (IBR) then Fannie Mae and/or VA guidelines will use the IBR payment as the monthly payment. Freddie Mac guidelines (updated Jan 2018) require the lender to use a payment equal to .5% of the outstanding balance (or the actual payment; whichever is greater). The least favorable underwriting is with FHA and RD loans which require the lender to use a payment equal to 1% of the outstanding balance as the payment for the student loan. This can make a HUGE difference on what you can qualify for.
Deferred Student Loans
If a student loan is deferred, FHA and RD mortgage loans require the lender to use a payment equal to 1% of the outstanding balance as the payment.
With Fannie Mae (and many State Housing Agencies which are underwritten to Fannie Mae standards), the lender can use either a payment equal to 1% of the outstanding balance or they can document what the actual fully amortizing payment will be and use the lower of the two. Freddie Mac says use the greater of 1% of the outstanding balance or the payment reported on the credit bureau.
VA mortgage loans say that if there is written evidence the student loan will be deferred at least 12 months beyond the date of closing, a monthly payment does not need to be considered. If the loan will come out of deferment in less than a year from closing, then the lender must calculate a payment by multiplying the balance X 5% and divide by 12.
Loans Being Paid By Another
If a student loan was co-signed by another and it can be documented that the other person has made all payments in the past 12 months then FHA says you can exclude it. With Fannie Mae and Freddie Mac, the person making the payments does not need to be a co-signer on the loan but it must be documented that the other party has made the last 12 payments out of their account. Excluding a student loan payment when qualifying a borrower can really help maximize what the borrower can qualify for.
Student Loan Forgiveness
The student loan can be excluded if the loan is currently in deferment or forbearance and the full balance of the student loan will be forgiven, cancelled or discharged or if there is an employment-contingent repayment program paid at the end of the deferment or forbearance period. The Borrower must show they current meet the requirements for forgiveness or cancellation or employment repayment and there are no circumstances that will make the Borrower ineligible in the future.