Hello, I typically pop in here and there for questions. However, I am seriously looking to buy a home within the next 8 months or so and I am concerned. My credit score is around 600 and however my annual income is only about 45k, I have 90k in student loans and I see that FHA uses 1% of total balance. I know I need to get my scores up so I am working on paying my credit cards down? I am also trying to get back into an IBR plan since I was removed when I started graduate school because my loans went into deferment. Is there any hope that I can get a home loan of at least 175k? Is FHA the only option?
Seems like if they use a percentage of your 90k loan your DTI will be too high. 1% would put you at 900 a month when they calculate your DTI not counting any credit card debt or car loans. If you can get your IBR to 0 and any other recurring debt down to 200 or so you might qualify. This is just based on some knapin math and a few calulator sites I use so take this with a grain of salt. Best of luck.
My guess is that you're considering an FHA loan because they are more forgiving regarding lower credit scores. Unfortunately, FHA is not going to allow you to use an IBR even if the payment amount is established. I just went over this with my own loan officer who recently took a course on this very topic. They are most likely going to use 1% of your total amount owed which will definitely destroy your DTI.
If your credit is currently at 600 and you've got 8 months before you're going to be looking to apply for a mortgage then your best plan of attack is raising your score and finding a loan other than FHA. Look into the USDA Guaranteed. If you can get your score up to a solid 660 then you should start finding some reasonable loan options. Anything backed by Fannie Mae or Freddie Mac (I believe) will use an IBR as long as your credit report is reflecting that it is in repayment for that amount.
I think the issue may be two fold here. Like a PP mentioned, when going the FHA route, it's FHA that mandates they must use 1% of your student loan balance. The IBR route will only matter if you're able to do a conventional loan and depending on your score at the time of application, the PMI rates may be better for you through FHA. PMI rates on conventional loans only get good when your scores are in the 700's.
The other issue may be your income and the amount of house you are trying to afford. FHA DTI calculations will allow you to go to 56.99% of your income, but you'll also have to find a lender that doesn't have overlays on this option that will require your DTI to be lower. If your income is $45K, that gives you $2137/mo as your max debt limit including your mortgage, taxes, insurance, and HOA's if there are any. Once you deduct your student loans, your monthly payment obligations cannot go over $1,237.
Even if FHA (and your lender) will allow you to hit 56.99% DTI - I personally would be very hesitant to do so. There's a reason that a lot of decent mortgage programs (I'm in MA and largely am referencing loans that are respective to my state only) want you to keep your DTI around 40%, especially if you don't have fantastic credit. Poor to fair credit indicates a past inability to make sound financial decisions (no judgment, there's a reason I'm on this forum too!) and putting almost 60% of your monthly income towards housing costs doesn't leave you a lot to work with, especially when inevitable surprise expenses crop up!
Just because you can, doesn't mean you should!
Get a letter from your student loan company with an estimate over 300 payments. It will make a different, I was in the same boat, $900 vs $583.71. I'm in IRB program too.
"ME, here’s the information you requested for your student loan(s). Once you begin or resume payments of this loan on 08/28/17, your estimated monthly payment amount will be $583.71. How was my estimated payment calculated? The payment amount shown above is an estimate based on the current outstanding principal balance, interest rate, and a repayment term of 300 payments. A repayment schedule with the actual payment amount will be issued 30 to 45 days prior to the next payment due date.
When you got the letter from your loan service provider giving you an 'estimate' over 300 payments did a lender accept that? I am falling into the same problem. I understand FHA is not going to work but the mortgage broker is saying that she needs a full amortization schedule to pay the debt in full but the loan provider will not give me one since the IBR has to be renewed yearly.
So, a letter from provider with an "estimate" may work?