Reader Question: Applying for a Mortgage While using Income Based Repayment

Welcome to another reader question!  This question comes from John, who is trying to get a mortgage while being on an income based repayment (IBR) plan for his student loan debt.  Here is John’s story and the question:

I have about $80,000 in student loan debt and am currently on the Income-Based Repayment Plan (IBR Plan).

The difficulty is that the plan only authorizes your payment for one year’s time – you must continually submit tax returns and your payment amount increases proportionally to your income. Well, recently when applying for a credit card with the local credit union that I am a member of, I had difficulty getting a decent credit limit because they kept looking at the amount I would owe each month under the standard repayment plan. The documents that my loan servicer provides describing my terms under IBR show my rate for the next 12 months, then shows a rate thereafter IF I do not resubmit income verification and thus default back into the standard plan (which would be around $940/month payment).

This same credit union (who also provides the best home loan rates, and I would like to use them in 2 years or so to buy a home) keeps viewing it as a “what if” I had to pay that full amount. I did educate them about how the reverification under IBR works, and even got a letter from my loan servicer describing that they only specify a particular payment amount for 1 year at a time, describing the reverification process and stating that that $940 amount was ONLY if I switched out of the IBR plan.  Regardless, the credit union was still very reluctant (despite seemingly understanding how the plan works) to lend. As I said, I am interested more so for down the road, as we would like to purchase a home in the relative near future.

Do you have any advice on this situation? I’m sure there are others on the IBR plan interested in buying a home that have similar difficulties with the unfixed nature of the loan payments.

Thanks for the great question John!  I’m sure that there are a lot of readers in the same situation as you are!

I should also note to readers (because someone will inevitably mention it), that both John and his wife have well-paying jobs, no other debt, and could afford both the higher amount of student loan payments (if they had to).


My Thoughts on Income Based Repayment and Mortgages

This is a tricky situation, but at least John has time on his side because he isn’t looking to get a mortgage for a few years.  My initial concern was with how the credit union initially got the $940 amount as the minimum payment due.  When you apply for a credit card, the credit card company (or credit union in this case) will pull your credit report and look at how much debt you have.  There are a couple columns listed: Balance, Minimum Due, and Payment History.

Fixing the Minimum Due

Chances are, your loan servicing company are not reporting the IBR Plan minimum due, but rather the Standard Plan minimum due.  You should write to the student loan servicer and ask them to send the correct information to the credit reporting bureaus.   According to the Department of Education, the repayment plan you choose is not reported to the credit bureaus, but your loan will be identified as a student loan, and they will report the status of your account (balance, minimum payment due, and payment history).  Here is a great resource on Income Based Repayment Plans from the Department of Education: IBR Plan FAQs.

Finding a Better Mortgage Option

My second thought was using the credit union for getting a mortgage loan.  I’m a fan of credit unions for some things, but in my search for a home loan, I’ve never found them to be very competitive.  The problem is they have overly strict lending standards that they adhere to (due to their member-owned status), and that usually results in rates that aren’t on par with the best in the market.  It also usually means tougher underwriting standards that make closing difficult.  I would recommend seeing what other lenders are out these and see if they offer better rates and fees.

I’ve had a lot of personal success with EverBank.  They will give you some of the best rates in the market, and they guarantee a single low origination fee.

Beyond EverBank, I also suggest checking out Bankrate and seeing what the best mortgage rates are (sort by lowest interest rate).  Then just make sure you know what the point and fee structure is.

If in doubt, check out my Ultimate Guide to Shopping for a Home Loan.

Make Sure You Know the Full Picture

Finally, it is important that you know the full picture of your credit report.  Maybe the student loans weren’t the only thing the credit union was concerned about.  For example, while you told me you were debt free, if you use your credit card each month and pay it in full, your credit card company may still report the balance on the closing date as your “Balance”.  So, even if you pay no interest, the credit union may assume you’re carrying a balance.  The trick is to pay off your credit cards and only use debit cards for 6 months prior to applying for a mortgage.  This will boost your score right before the application, which will help.

You should also make sure that your credit report is correct.  You can use once a year to get a free copy of your credit report.  Then just verify to make sure all the information is correct.  If you’re curious about your credit score, you can pay to view them.  I partner with Equifax to allow readers to check their credit scores.

What other tips do you have for John to get a mortgage under IBR?

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  1. says

    Good tip about making sure your credit report is accurate. You can actually get THREE free credit reports annually–one from each of the three credit reporting bureaus–through the link you mention. As there can be differences between the reports and you don’t know which report a lender (or employer or insurer or landlord) may be accessing, it’s important to review all three for accuracy. Yes, it’s a pain, but important because one error could cost you thousands in interest expense or insurance premium, a job, or an apartment.

  2. John says

    Hi Rob, Thank you for posting my question.

    Unfortunately they pulled that report before I switched over to the IBR plan. I was on forbearance until February, planning to switch over to IBR when the forbearance ended. In hindsight, I should have done that before we applied for the credit card in December. When he pulled the report, it listed the monthly amount due under the standard plan (the $940). Since then, I switched to IBR, in which I have a $0 monthly due. I tried reconciling that with the credit union, and he does now see that it says $0 due on my credit report.

    They keep getting caught up on the “what happens after one year” question though. The document that my loan servicer provides says “Amount due for 12 months: $0” then under it says “Amount due after 12 months: $940.” I even got them to write a letter for me clarifying that the “after 12 months” amount ONLY happens if I do not resubmit the forms to stay in IBR and thus default back to the standard repayment plan. I showed them the federal government’s online calculator where you can put in your income and family size to calculate future payments. Even when my payments do catch up to my current income (as your payment is pegged to last year’s tax return, which in turn is based on income earned the year before’s income) my payments would only be $340. But they are still very reluctant, and say they cannot accept any ‘estimates” on my part.

    But yes, definitely great tips on monitoring your credit report. I would even go further and recommend a credit monitoring service that we use – Bank of America’s Privacy Assist.

    • Jessica says

      I am having the SAME problem. My problem is even though my income based repayment is 0, it sill shows on my credit report as 1300 a month and the student loan (Direct Loans) will not remove that. The mortgage writers want a guarantee for 12 months that my payment will not change. They want the 12 months to start on the date of closing. Which my payments are in repayment and won’t be re evaluated until November. Have you had any luck yet??

    • Dana says

      John, going through the exact same thing. By chance have you gotten a solution? One thing I think may work is that you can reapply, 60 days prior to the end of the current IRB. That will show 14 months out, if you get the application processed timely. With that being said, whatever the new rate amount would be, would show income beyond 12 months and could be used to calculate the mortgage. I won’t know until December 2015, but I’m hoping that will work.

  3. cean says

    I too am at the will of the IBR. Is there any help for us who have only one income below the 35k annually.
    Broker told me I would have to make an exceptional amount of money to even be considered.

  4. Mjm says

    I’m going through the same thing right now. My husband and I both have lots of student debt, but we have excellent credit and are on IBR. Our credit union won’t apporve us for a mortgage. I suppose we should look at private banks? It could be 2 decades before we pay this off!

    • says

      You can try that route, but remember – they will always calculate your loan on the Standard repayment. If you have higher income to afford a house, you also run the risk of getting your IBR payments reassessed even higher.

      • Robert Jones says

        That’s not a real risk, though. They set your loan payment, once you move past the 150% of poverty level income, at 15% of your disposable income. Disposable income, using their calculators, seems to be around 25% of your monthly income. So in the end, you’re always only ever going to pay between 6% and 9% of your monthly income to your loan. Even calculating what you might pay in the future, you are almost always going to have a higher DTI, if you have other debt, when only having to pay $0/month on IBR to student loans, than if you had to actually pay something on IBR.

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