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 Costco Finance. They will give you 4 of the best rates in the market, and they guarantee a single low origination fee, so you know you’re comparing apples-to-apples. I’ve found that the total cost of the Costco lenders are usually better than the best lenders out there.
Beyond Costco, 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 AnnualCreditReport.com 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?