Student Loans and New Mortgage

[nmjacobs]

Hello all. We purchased our first home in 2017. At that time, they calculated 2% (I think that was the number) of my student loans balance since I was on an income-based plan with a $0 payment. I am in school again and had to take out loans this year (final year of courses) after my job being cut  in May (old employer was paying my tuition). Prior to applying for the student loans, I had been approved for a SAVE plan with a payment of $0. Then the loans were automatically put into deferred status once school started up. From what I am reading, it sounds like some things have changed since 2017 as far as how student loan payments are calculated for DTI. It looks like I need to request that they be taken out of deferred status and show a SAVE payment of $0/month otherwise they will need to use 0.5% of my balance ($50k) to calculate a payment. Is this correct? 

[ShanetheMortgageMan]

Student loans are treated differently depending on the loan program you are qualifying for.

In your situation, the only loan program you could leave them in deferment for and not have to include a monthly payment in your DTI is Freddie Mac financing, but you must be in a forgiveness, cancelation, discharge or employment-contingent repayment program and both:

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

Otherwise, with Freddie Mac financing, in all other cases, an amount greater than zero must be included in the monthly debt payment-to-income ratio for all student loans, as described below:

For student loans in deferment, forbearance or repayment, including income-driven repayment plans:

• If the monthly payment amount reported on the credit report is greater than zero, the the lender must use the monthly payment amount reported on the credit report, unless other documentation supports a different current payment amount greater than zero, or
• If the monthly payment amount reported on the credit report is zero, the lender must use 0.5% of the outstanding loan balance, as reported on the credit report, unless other documentation supports a different current payment amount greater than zero

With Fannie Mae financing, it's a little simpler, and their guidelines are:

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 you.  

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 you are on an income-driven payment plan, the lender may obtain documentation to verify the actual monthly payment is $0 and 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.

So with Freddie Mac you might not have to take them out of deferment to count a $0 payment but with Fannie Mae you definitely would have to take them out of deferment and put them into the SAVE plan with a $0 payment in order to avoid including a payment in your DTI.

What are your credit scores like and/or are you eligible for a VA mortgage?

[nmjacobs]

Thank you!

I am not yet sure if it will just be me applying for the new mortgage or also my husband. My scores should be well over 640 once I pay down my 3 cards and remove old collections. My husband is below 600 (550) right now so I am not sure how much his scores will go up once we pay down his 3 cards and have a collection removed. So, I don't know if we will do Freddie Mac or Fannie Mae. It will just depend on what our scores are in March/April. 

I did use the payment estimator for my loans and put in our updated income and it shows my new payment (SAVE income driven plan) will be $81/month ($112k household income and 5 kids). I am also planning to apply for PSLF since my past and current employer qualify. 

[ShanetheMortgageMan]

You're welcome!  With your projected credit scores, and if you or your husband aren't an eligible veteran, then FHA financing might be the better option especially if you aren't planning on a large down payment.  The reason being is that interest rates and PMI get much higher with Fannie Mae & Freddie Mac financing for lower scores (below 680).  It's good to compare both though.

FHA's guidelines for student loans, regardless if they are deferred or not, are:

The following is used to calculate the minimum monthly payment:
• the payment amount reported on the credit report or the actual documented payment, when the payment amount is above $0; or
• 0.5% of the outstanding loan balance, when the monthly payment reported on your credit report is $0.

So with FHA you can take them out of deferment and put them into the SAVE plan and be able to use the $81/mo payment in the DTI, otherwise if they are in deferment then .5% of the balance will be used as the monthly payment.

[nmjacobs]

Thank you. We have about $100k of equity in our home (owe $119k, market value is over $225k). 

[ShanetheMortgageMan]

If you put at least 10-15% down then conventional could make more sense, I'm just recommending to ask your eventual loan officer about both options so you can compare the monthly payments as FHA should have lower interest rates and possibly lower PMI.  But once you put 20% down FHA will still have PMI (just called "MI" if it's FHA) whereas conventional won't have PMI.

[nmjacobs]

Quick Update: I pulled my mortgage scores (purchased the monthly MYFICO subscription). Scores are currently 595, 665, 671. I just paid off one card and 50% of the other so I expect these will go up a bit next month. I also have several very old collections set to come off between April -June. We also paid off all of my husband's cards and will have one old collection to possibly pay for delete, if needed. I'll pull his mortgage scores once his reports update. My student loans are currently on SAVE again and I have applied for the public student loan forgiveness program. 

[ShanetheMortgageMan]

For those old collections you should look into early exclusion to get them removed ahead of the 7-year mark.

[nmjacobs]

Yes, I already did EE on Transunion and they deleted right away. Two weeks ago I did EE on Experian (online) and they didn't delete them so I'll try again in a month or so. July 2024 will be 7 years for these (based on DOFD). Experian shows these falling off there April 2024. I'm guessing they built in the 3 months of EE and that's why they didn't delete when I requested EE. Equifax shows they will fall off July 2024. I've read it might be best to not mess with EE on Equifax.