Student Loans and Mortgage Approval. What are the guidelines?
Minneapolis, MN: Student loan debt is at an all time high, and has been noted as a contributing factor to why may people have been unable to purchase a home, especially first time home buyers.
Recent changes to Fannie Mae and Freddie Mac guidelines have made it easier for some, but not all with student loan debt to still qualify for home mortgage loans.
Fannie Mae and Freddie Mac do not do home loans. Rather they buy loans from lenders after that fact. Both Fannie and Freddie have set underwriting guidelines that if lenders follow, makes the selling of loans to Fannie Mae and Freddie Mac much easier. While the number moves, at any given time, Fannie Mae and Freddie Mac control +/- about 60% of all home loans.
Student Loans. How do lenders calculate?
Student loans can be in active repayment, some sort of reduced repayment (which is typically an income based repayment), or completely deferred. While a student loan may be deferred for the next year or two, your mortgage loan is typically a 30-year loan. It only makes sense that lenders take current or future student loan payments into consideration when calculating debt ratios and affordability.
To avoid confusion, I’ll just talk about current guidelines for how lenders currently deal with your student loan debt for debt-to-income ratio purposes.
These guidelines are current as of this article (Dec 1, 2017 (updated)).
FHA Loans:
FHA loans must use the greater of 1% of the outstanding balance, or the payment listed on the credit report, unless you can document the payment is a fully amortizing payment. No income based repayment, graduated payments, or interest only payments allowed.
Fannie Mae Loans:
For deferred loans, must use 1% of the outstanding balance. For loans currently in repayment, use the payment listed on the credit report. If payment is listed as $0.00, but $0.00 is an active income based repayment, we must verify with the student loan company that $0.00 is the income based repayment.
Freddie Mac Loans:
For loans in repayment, use the amount listed on the credit report, or at least .50% (1/2%) of the outstanding balance, whichever is greater.
For deferred loans, must use the amount listed on the credit report, or 1% of the outstanding balance as reported on the credit report.
USDA Rural Housing Loans:
For USDA loans, if the loan is deferred, income based payment, graduated payment, or interest only payment, must use the greater of 1% of the outstanding balance, or the amount listed on the credit report.
VA Home Loans:
For VA loans, if payment is deferred at least 12 months past the loan closing date, no payment need be listed.
If payment will begin within 12 months of closing, use the payment calculated based on:
a) 5% of the outstanding balance divided by 12
b) The payment listed on the credit report if the payment is higher than calculated under (a).
or
If payment on credit report is less than (a), a letter, dated within the last 60-days directly from the student loan company that reflects the actual loan terms and payment information is required to use the smaller payment.
More people with student loans now qualify
These updated guidelines primarily help those currently in repayment, but with income based, graduated payment, and interest only payment student loans obtain conventional loans.
Regardless of your student loan status, I always suggest that people never assume you can’t buy a home. Always talk with a professional licensed Mortgage Loan Officer to get the facts regarding any financing options. I offer all this loan option and more for properties in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota and can be reached at (651) 552-3681, or www.MortgagesUnlimited.biz
