Qualifying for a Mortgage with Student Loans

Mortgage Underwriting Criteria for all Mortgage Types

Conventional Fannie Mae:

https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B3-Underwriting-Borrowers/Chapter-B3-6-Liability-Assessment/1032996291/B3-6-05-Monthly-Debt-Obligations-02-05-2020.htm#Student.20Loans

 

Student Loans

If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the credit report does not reflect the correct monthly payment, the lender may use the monthly payment that is on the student loan documentation (the most recent student loan statement) to qualify the borrower.

If the credit report does not provide a monthly payment for the student loan, or if the credit report shows $0 as the monthly payment, the lender must determine the qualifying monthly payment using one of the options below.

  • If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0. The lender may then qualify the borrower with a $0 payment.

  • For deferred loans or loans in forbearance, the lender may calculate

    • a payment equal to 1% of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), or

    • a fully amortizing payment using the documented loan repayment terms.

 

Conventional Freddie Mac:

https://guide.freddiemac.com/app/guide/section/5401.2

(i)Student loans

(A)Student loans in repayment, deferment or forbearance

For student loans in repayment, deferment or forbearance:

  • If the monthly payment amount is greater than zero, use the monthly payment amount reported on the credit report or other file documentation, or

  • If the monthly payment amount reported on the credit report is zero, use 0.5% of the outstanding loan balance, as reported on the credit report

(B)Student loan forgiveness, cancelation, discharge and employment-contingent repayment programs

The student loan payment may be excluded from the monthly debt payment-to-income ratio provided the Mortgage file contains documentation that indicates the following:

  • The student loan has 10 or less monthly payments remaining until the full balance of the student loan is forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, or

  • The monthly payment on a student loan is deferred or is in forbearance and the full balance of the student loan will be forgiven, canceled, discharged or in the case of an employment-contingent repayment program, paid, at the end of the deferment or forbearance period

  • AND

  • The Borrower is eligible or approved, as applicable, for the student loan forgiveness, cancelation, discharge or employment-contingent repayment program, and the Seller is not aware of any circumstances that will make the Borrower ineligible in the future. Evidence of eligibility or approval must come from the student loan program or the employer, as applicable.

FHA:

https://www.hud.gov/sites/documents/16-08ML.PDF

 

HUD Single Family Housing Policy Handbook 4000.1

https://www.allregs.com/tpl/Search#q=student%20loans

(G) Deferred Obligations (TOTAL)

(1) Definition

Deferred Obligations (excluding Student Loans) refer to liabilities that have been incurred but where payment is deferred or has not yet commenced, including accounts in forbearance.

(2) Standard

The Mortgagee must include deferred obligations in the Borrower’s liabilities.

(3) Required Documentation

The Mortgagee must obtain written documentation of the deferral of the liability from the creditor and evidence of the outstanding balance and terms of the deferred liability. The Mortgagee must obtain evidence of the actual monthly payment obligation, if available.

(4) Calculation of Monthly Obligation

The Mortgagee must use the actual monthly payment to be paid on a deferred liability, whenever available.If the actual monthly payment is not available for installment debt, the Mortgagee must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment.

 

(H) Student Loans (TOTAL)

(1) Definition

Student Loan refers to liabilities incurred for educational purposes.

(2) Standard

The Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.

(3) Required Documentation

If the payment used for the monthly obligation is:

  • less than 1 percent of the outstanding balance reported on the Borrower’s credit report; and

  • less than the monthly payment reported on the Borrower’s credit report;

the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor.

(4) Calculation of Monthly Obligation

Regardless of the payment status, the Mortgagee must use either:

  • the greater of:

    • 1 percent of the outstanding balance on the loan; or

    • the monthly payment reported on the Borrower’s credit report; or

  • the actual documented payment, provided the payment will fully amortize the loan over its term.

VA:

(Pg 33) 

https://www.benefits.va.gov/WARMS/docs/admin26/pamphlet/pam26_7/ch04.pdf

g. Deferred Student Loan Payments

If student loan repayments are scheduled to begin within 12 months of the date of VA loan closing, lenders should consider the anticipated monthly obligation in the loan analysis. If the borrower is able to provide evidence that the debt may be deferred for a period outside that timeframe, the debt need not be considered in the analysis.

USDA:

(Pg 4)

https://www.rd.usda.gov/sites/default/files/3555-1chapter11.pdf

 

Student loans

Lenders must include the required payment as applicable:

· Fixed payment loans: A permanent amortized, fixed payment may be used in the debt ratio when the lender retains documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed. The fixed payment will fully amortize/pay in full the debt at the end of the term.

· Non-Fixed payment loans: Payments for deferred loans, Income Based Repayment (IBR), Income Contingent (IC), Graduated, Adjustable, and other types of repayment agreements which are not fixed must use the greater of the following: 1. One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, or 2. The current documented payment under the approved repayment plan with the creditor.

· Student loans in the applicant’s name alone but paid by another party remain the legal responsibility of the applicant. The applicable payment must be included in the monthly debts.

· Student loans in a “forgiveness” plan/program remain the legal responsibility of the applicant until they are released of liability from the creditor. The applicable payment must be included in the monthly debts.

2020 Clients2Homeowners.com created Feb. 2020