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).
Why Getting A Mortgage While On IBR Is A Challenge
Getting a mortgage while on any type of income-based repayment plan will be a challenge – and pretty much impossible for some. The reason is, Fannie Mae and Freddie Mac, the two largest mortgage insurance companies (and they pretty much set the rules for “conforming” loans), have created the following rules for dealing with borrowers under income-driven repayment plans (IBR, PAYE, RePAYE, ICR).
If you read Fannie Mae’s guidelines, they state that a lender must use one of the following to calculate the debt payment for the student loan for the debt-to-income ratio:
- The payment amount listed on the credit report, not the amount due (even if it's an income driven repayment plan like IBR)
- 1% of the outstanding balance (which is almost always higher than the IBR payments)
- The actual Standard plan repayment amount reported on the credit report (this is the most common method lenders choose because it’s the easiest). Remember, your credit report will always show your standard 10-year amount for “Amount Due”, not the amount you actually pay
- A calculated payment that will fully amortize the loan over the repayment period (this means that you have to calculate a payment with no forgiveness after 20/25 years). This could be equal to your IBR payment or higher.
This rule is what makes getting a mortgage a challenge.
If you don't know what your credit report says, you need to head over to AnnualCreditReport.com and find out. Here's a picture from my credit report so you can see what to look for:
A few things:
- Many lenders only report the actual payment amount and if it was delinquent. As such, your “scheduled” payment amount may be blank
- I've also seen some banks put the Standard 10-year plan amount as the “scheduled” payment amount, and then the actual payment amount shows as less
- Some lenders put the payment plan in the comments, but most do not
My Thoughts Applying For A Mortgage While On Income Based Repayment (IBR)
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. Here's his options (and they aren't great).
Knowing What Your Student Loan Payment Would Be
The first thing to do is to know exactly what number your lender is going to use for your student loan payment. That means doing a little homework and knowing the number for each of the three scenarios above.
Do you know what your credit report says?
Do you know what your payment would be at 1% of the loan balance?
Do you know what your student loan payment is on the standard repayment plan?
And most important (because this is the one scenario that could help you), do you know if your loan payment under IBR will fully amortize the loan? This last one sounds complicated, but it really is asking – are you going to get loan forgiveness or not? If you're going to end up fulling repaying the loan before your 20 or 25 year timeline is up, your loan is said to be fully amortized. That means your IBR payment would count for a lender. But you will likely have to educate them on this.
** Also important to note – there is a difference between the law and a bank or lender's policies. Some lenders will have policies to use one formula, and there won't be much you can do to change that. Other lenders may be more flexible.
The big takeaway here is know what your Debt-To-Income ratio (DTI) would be.
Finding A Better Mortgage Option
If you're struggling with your lender, or your lender isn't able to answer these questions, it's probably time to find another lender. We recommend LendingTree to compare your loan options. In about 5-10 minutes, you'll get quotes from multiple lenders, and you can have conversations with the about your debt-to-income ratio situation.
The earlier you share this with your lender in the process, the smoother you can go. Some lenders will write you off right away, but others may be more willing to work with you through the process.
We like LendingTree because you have multiple lenders working at once, versus just one bank or credit union you might have otherwise. Give it a shot here: LendingTree.
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 Credit Karma 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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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.
Excellent tips. I have had to correct things on my credit report more than once. It amazes me that they aren’t more accurate.
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.
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??
You can ask them to restart the IBR for the date you need, even if your current IBR agreement has not ended.
What mortgage lender was this?
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.
I’m facing this issue as well. What was even more frustrating is that 2 out of the three lenders pre-approved us using our income-based payment without questioning it. It wasn’t until the third lender told us they needed documentation of what our full payment would be that we realized this was going to be a roadblock. We had to then bring this to the other two lenders attention, and they then apologetically let us know they wouldn’t be able to lend to us… this is after a year of working with them… much more to this story, but I would like to put something out there to those commenters who are being affected. Let’s form a group and take action. We could start by writing to our senators and congress to show them just how many hardworking individuals are being affected by this ‘rule’. How many of us are not able to buy a home because payments we are not even accountable to pay are being used in these calculations. Repayment plans like IBR were created in response to yet another economic crisis to support low-to-moderate income families with their student loans, recognizing the present terms were unreasonable for so many people. Programs like USDA and VHA are suppose to be helping these same families buy their first homes, so why arent they working together? I understand we all made the choice to take out these loans, but this problem goes far beyond ‘overborrowing’. Lack of education and awareness regarding how these loans would affect us, pressure to attend the best schools, and a declining economy are just the beginning. If you’d like to be involved in these efforts, please email me at lindsayguidowilliams@gmail.com as I’d love to organize our efforts and be part of a moment to change things back to how they were. Instead of venting here, let’s vent to those who really need to hear us!
I sent you an email, I am in the exact same boat and have called to complain to Nelnet several times.
I just went through this due to the policy changes on FHA loans and rural development loams I will not qualify for a loan being a ingle mother working three jobs. I need to rent which cost way more than paying a house payment probably till dead is how I feel. I am on the ibr plan now for student loans and even if I have $20000 down on $50000 house I still do not qualify. My daughter who is 12 said she never wants student loans because she is watching me struggle trying to buy a house work three jobs and care for her. The only advice I can give my child about getting a higher education is either get a full scholarship to pay for school or don’t bother. Its sad being I’ve applied at countless jobs in c.j. and have not yet found one.
I agree! I have been so DEPRESSED. I have a Masters in Biology and even making 52000 a month and only wanting a home under 150,000 I still do not qualify. I have a credit score in the 700s. How is it that you go to school, get an education and then are told, hahaa you cant get a house?? Its making a LOT of people I know not want to go to school now. The government has really failed us. I think it will be funny when this whole plan of theirs crashes because lets face it, educated people buy homes and without being able to qualify, they are going to be hurting because they will be selling less. VERY unhappy with America for this.
Hello Lindsey, I in the same boat and it is devastating I, it is as we are being punished for get a higher education. I have emailed my congressman.
Good for you emailing congressman. I will be doing the same!
Same boat! Yes, we need to complain to the right people. I will email you.
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.
You probably won’t qualify for a loan on that income, your best bet is to rent and save more money.
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!
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.
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.
I am currently experiencing the same thing. My IBR payment is currently $0. Each year in April I have to reapply. If I don’t, my payment will be $680 monthly. The lender has to calculate 1% of my student loan to put in the debt to income calculation or use the $680.This is putting me over 43% on my DTI. The information on my credit report is correct. But, I don’t think it is fair to look at a payment that far in advance.
I can see where you don’t think it’s fair, but as a lender trying to assess your ability to repay, you technically can’t afford your student loan debt and need a special payment plan. Why should they give you a mortgage?
I know that’s harsh, but it’s reality. If you don’t plan on earning significantly more in the future, an alternative is to earn more side hustling or freelancing, save a bigger down payment, and then take out a smaller mortgage payment.
I understand your line of thinking. However, a lender trying to assess your ability to repay should take into account that he will never pay that much as long as he re-certifies or significantly increases his income. A single taxpayer with no dependents making $80,000 will only be required to pay $518 a month (.08 effect on debt payments to income ratio). Getting married or having kids drops that monthly payment amount.
It’s not about having technically unaffordable student loan debt. It’s about lenders getting paid back. I know this comes across a bit like whining, but why should $60,000 loan balance count as a $600/month loan payment when I could consolidate with the Federal government for a $450/month loan payment (25 years).
For what it’s worth Fannie Mae has a better way to calculate the student debt payments. Here is the link – https://www.fanniemae.com/content/guide/selling/b3/6/05.html#Student.20Loans
I would suggest looking at Fannie Mae conventional loans for many of the high balance $0/monthly payment borrowers on IBR.
Hey Full, that’s incorrect. And if you read Fannie Mae’s guidelines, they state:
– 1% of the outstanding balance (which is almost always higher than the IBR payments)
– The actual Standard plan repayment amount reported on the credit report (this is the most common method lenders choose because it’s the easiest). Remember, your credit report will always show your standard 10-year amount for “Amount Due”, not the amount you actually pay
– A calculated payment that will fully amortize the loan over the repayment period (this means that you have to calculate a payment with no forgiveness after 20/25 years)
As for your example, you’re mixing repayment plans between your two paragraphs. IBR/PAYE/RePAYE is income based and requires re-certification. This plan will always use your standard repayment amount for qualification because there is risk in your payments rising – however, they will never rise above the standard repayment plan amount. That’s why lenders can’t use your IBR payment. It can change every year.
Your $60,000 example, you state a payment of $450 over 25 years. This sounds like the Extended Plan. If you’re on the Extended Plan, your payment to fully amortize the loan doesn’t change, and in that case, lenders will use that payment amount.
Even if the payment was to increase every year it would be accompanied by an increase in income. It is calculated by a percentage of your discretionary income (10%-15%). Therefore, a payment increase would not happen unless there was an increase in discretionary income. So the logic for the rationale is flawed. Lenders are assuming an increase in monthly debt without an increase in monthly income, and this is not possible on an IBR plan.
No, but lenders have to hedge risk over the full term of the loan. Given that the maximum amount the payment can be is the Standard plan amount, as a lender, it makes sense to use that amount when calculating debt to income ratio.
I would tell you personally, if I was going to carry a mortgage on a house I was selling, I’d do the exact same thing. The bottom line is, if you’re on an income-based repayment plan, you cannot afford a mortgage because you cannot technically afford your student loan payments.
But your income can change from year to year too. It could go up or down….but they don’t base their decision on your ability to keep a job! IBR and ICR are based on your income rising or falling. They won’t go up if your income doesn’t. Period. Unless you are just stupid and don’t send in your paperwork.
Are you saying if, I get on an extended plan an make those payments for about six months and then apply for a mortgage. The lender would use that payment amount to calculate my DTI?
Yes, extended plan payments count because they full amortize the loan.
I am a teacher with 135,000 student loan. I am on an PSLF IPR. I am trying to refi my home to get out of my current 5 year balloon loan and cannot seem to get anywhere because they say FHA looks at it as 1% of my student loans, even though I only pay $39/month. My question is very simple. What the hell is the point of even doing the IPR if I am only going to be handcuffed into not being able to refi/buy a home? It is very misleading to me that a federally funded program like the IPR is essentially making it impossible to live the american dream of owning a house. Therefore, not being able to afford college without student loans a person must decide… have student loans and an OK job, but never OWN a home, or don’t go to college, make a low wage (typically with no secondary education), so therefore save pennies for years to pay somewhat for college, to eventually get a good paying job, all while finally being able to buy a home at the age of 40 or even older. I’m pissed and really struggling to understand why a federally ran IPR program isn’t scene as adequate when dealing with mortgage lenders.
Hi Daniel, I can understand it’s frustrating. But realize that the $39 you pay can change every year. It can go up (and yes it can go down). If it goes up, there is a maximum it can go, which is your standard repayment plan amount (which is around 1%, so either can be used by lenders).
If you’re a bank, and looking at a loan over 30 years (or whatever length), it’s fine to say someone can afford it today. But what if your income rises and your student loan payments rise? The bank and financial system are looking to hedge risk not just today, but in 3 years/5 years etc.
I get you plan to have it forgiven under PSLF (which is a great strategy), but to a bank, it simply looks like you over-borrowed.
Robert, that still makes no sense to me. It doesn’t consider the fact that under the ibr plan, if I end up with a monthly payment amount equivalent to what it would be under the standard payment plan, I would have a very high income. In my case, 1% would put my monthly payment at $1600 (I actually pay $180 under IBR). My annual income would have to be well over $100k before I’d have to pay that much per month under IBR, which means my debt to income would still be quite sufficient for a decent mortgage. If anything, I think banks are concerned that the promise of student loan forgiveness will be trashed, and we’ll all get totally screwed. Overall, what it sounds like is that the rules need to be changed. If anyone under IBR can’t buy a house till they are 40, that hurts our economy. This whole student loan problem stinks. Everyone’s getting screwed except for banks, who are making a killing. Post high school education in today’s job market is the equivalent of a high school degree 30 yrs ago, but it isn’t funding accordingly. There are huge positive externalities associated with an educated and capable society, and I don’t understand why half our country doesn’t understand that.
Amen! I was pre-approved for a mortgage and 2 weeks from closing when all of a sudden the bank says “Oops! We put the wrong amount in for your student loans! We have to use the 1% and that makes your debt to income ratio to high.” I have worked really hard to improve my credit score to buy a condo. How can the banks not be required to honor the PSLF program? The rules need to change! I work full-time and can’t buy a home, yet people who live off of the government are handed homes?!?!?!
Best option I’ve found to address this issue is a Fannie Mae conventional loan. I’ve refinanced in the last year with 70k in student loans but a $0 IBR payment. Had to Temporarily change my IBR plan which was a hassle. FM would take a $10 payment but not $0. So if you have an IBR plan above $0 it should work, though you’ll need special documentation. I’ve also heard a local credit union might be more accommodating (depending on who you speak to). Especially if you have a previous loan history with them. Yes, the rates are not as competitive, but a house at a slightly higher rate (maybe .5 -.75%) is likely better than waiting ten years for those loans to be forgiven.
This response is wildly helpful. It mirrors my exact situation. Can you be more specific about the special documentation that allowed an IBR payment of greater than $0 to qualify? I want to have my documentation ready for lenders. I am looking into a Fannie Mae or Freddie Mac loan.
I don’t want to give you and other readers hope, so if the original commenter doesn’t respond in the next few days I will delete these comments. I’ve been doing this for years and while there are sometimes flexible credit unions, any lender who wants to provide a conforming loan cannot take anything but the 1% loan amount or standard repayment plan amount. Fannie Mae and Freddie Mac only issue conforming loans, and Fannie Mae is who wrote the requirements.
You can always change your repayment plan to Extended (the 25 year one), but you might not be able to afford it, and it still might skew your debt to income ratio.
Freddie Mac accepts the $0 IBR with a slightly higher %
Interested as well! My husband and I are totally discouraged after finding this out. I feel like I am being punished for trying to make something of myself. First gen college and grad school graduate. Yet can’t buy a home. Smh.
I don’t want to give you and other readers hope, so if the original commenter doesn’t respond in the next few days I will delete these comments. I’ve been doing this for years and while there are sometimes flexible credit unions, any lender who wants to provide a conforming loan cannot take anything but the 1% loan amount or standard repayment plan amount.
You can always change your repayment plan to Extended (the 25 year one), but you might not be able to afford it, and it still might skew your debt to income ratio.
In the middle of a conventional loan now. 99% of loan stips are complete. Only issue is IBR payment. This is my last stipulation from underwriter: FROM UNDERWRITER—Please note: DOCUMENT PROVIDED REFLECTS THE PAYMENT IS INCOME-BASED AND NOT FULLY AMORTIZING. BORROWER TO PROVIDE DOCUMENTATION FOR FULLY AMORTIZED PAYMENT OR BORROWER MUST QUALIFY WITH 1% OF THE
BALANCE AS HIS MONTHLY PAYMENT, PER FNMA GUIDELINES.
Yes, this.
This seems somewhat hypocritical, I understand that financial institutions are looking at years down the road and the loan payment possibly changing, but that is no different than someone qualifying for a home, closing on that home, and then lose their job 3 months later and are in foreclosure.
At the end of the day both approaches are a risk that lenders make, and the latter appears to be more of a risk than the former, and the leading reason why many default on their mortgages, not because their IBR could “theoretically” change after 12 months.
-Just saying
Great example – I don’t make the rule…I just share them.
I’m super confused? So what is the best option for your student loans in order to get a home loan? #mycurrentsituation
The best option is to be on a standard repayment plan – 10 year fixed or 25 year extended.
After doing some research it appears Freddie Mac will allow a conventional loan while including IBR in DTI with proper documentation.
It appears there is some hope after all.
Where did you find that?
Sorry for the delay. I went to their website and researched their Loan Prospector Documentation Matrix. Here is the link.
http://www.freddiemac.com/learn/pdfs/uw/docmatrix.pdf
As long as the payment is showing on the credit report, or documentation is provided they will accept the IBR amount.
I also spoke to an underwriter at BB&T bank; my wife and I are currently home hunting, and the underwriter informed me they will accept IBR as long as an official letter with proper documentation shows the amount of the IBR. If not they will have to calculate 1% of the entire student loan amount.
However, I realize all of this can change like the weather.
Lamar were you able to get loan with BB&T , I had same issue with student loans im in process buying home were I live , looking for best options , Does BB&t work with IBR repayment .?? Thanks
No private loans will offer IBR for repayment.
I have a somewhat complicated scenario that I’m trying to figure the best path forward. My wife has just about $115k in student loan debt, and I have none. I make significantly more than her currently and was already pre-qualified for a $400k mortgage before we were married several years ago. Our big thing right now is just paying off CC debt and saving for the down payment so that we can get the best rate and lowest mortgage payment possible.
Right now her IBR is $315 per month and we are just about to get into tax season where we have to make the choice on how to file. If we file jointly her IBR goes up to $1,200 per month with the pooled incomes. If we file separately it will obviously stay the same. But when we apply for the mortgage together they will still count her standard payment of around $1,100 into the dti calculation if I understand thing correctly. We are honestly wondering if we should file separately for this year and if I should apply for the mortgage in my name only (then put her name on the deed as well). Essentially we could get approved for a much better loan for our future home.
Then the plan soon after we get teh home would be to probably refinance her loan with a private lender with a 25 year period and the payment would be somewhere in the realm of 500-700 which we could totally swing.
My main thinking behind this, although somewhat unconventional, is to be able to get the best rate on our mortgage (since I have much better dti on my own) which will ultimately save us a boatload in the long term.
Does this at all make sense. Any idea on the types of professionals I could run this by? Mortgage broker? Tax professionals? Both?
Real life is hard.
You sound like you’re on the right track. Married filing separately is a solid route to take, but do the math (you pay more in taxes this way). Here’s an article that breaks it down: http://thecollegeinvestor.com/17807/the-math-behind-married-filing-separately-for-ibr-or-paye/
I have been a mortgage lender for over 12 years. This is a very good topic and I am glad there is a message board about it so millennials can understand some of the strict rules around IBR and student loans. Fannie Mae makes you use 1% or a fully amortizing payment. So some of the messaging above about Fannie Mae is correct. Freddie Mac though still allows an IBR but the IBR payment must show up on the credit report. Otherwise, you must use 1% of the balance or show the proposed payment from the student loan lender. Neither Fannie or Freddie allow you to not count a payment at all during deferment. Keep in mind these are guidelines as of Feb 9th, 2017 and are always subject to change by the agencies. I hope this info was useful. Home ownership rate is at a 50 year low and it is important to our economy the younger generation continue to buy homes.
I am just now learning all of this as we are finding ourselves in the same position as many of these other posts. We have medical student school loans, but as chiropractors we don’t fall into the category of “Doctors” that many loan companies will overlook the loans. Our bank gave us a game plan on what we needed to do nd now they are saying that they likely can’t fund us because of our IBR. We are on a land contract with our house and were looking to purchase this summer on a Rural Development loan.
Does Freddie Mac do Rural Developments?
NACA accepting IBR
I am currently going through the NACA program. Yes, NACA accepts IBR, but does the underwriters accept it?
Does this only count if standard 20% down or can IBR also be used for Freddie Mac 3% and 5% down conventional loans as well?
Thank you.
Hello Nice topics, how can a IBR payment show in your credit?? I have not seen that. I’m paying for about a year.
Thank You
Your IBR payment will show on your credit report. However, it’s going to show as:
Schedule Payment Amount: Your Standard Plan Payment Amount
Actual Payment Amount: Your IBR Payment
Even though the payment is lower, it won’t show as past due. In the comments, they might have something like “Fed IDR Plan” or similar to highlight you’re on an income-driven repayment plan.
For your mortgage, your lender will typically use the 1% balance, or the standard repayment plan amount.
On all three of my credit reports, the standard payment does not show at all. Scheduled payment shows $314, actual payment shows $314, even though it is an IBR. There is nothing in the notes about it being income-based payment. However, my lender asked if it was an IBR. I said yes and was informed they would need to use 1% of loan, even though standard payment is not reported to credit report. Does the lender see a different version? (My reports were obtained from annualcreditreport.com yesterday).
The lender does see a different version – they pay for a much more robust report.
So i pulled the Fannie Mae- it saids ” if the credit report does not reflect a monthly payment,document file with monthly payments used( payment coupon,canceled checks,etc).”When student loans def/forb provide doc veri proposed monthly amt or use min 1% of balance. Can you direct location abt income base?
What it saids about that? In
same situation as other. On income base trying buy home.
What that means if if your loan is currently in deferment or forbearance, you’re not making payments – as such, your credit report might not reflect a monthly payment. A lender is required to get documentation to verify what your monthly payment would be if you were paying the loans.
How do you obtain documentation of what your payments will be? I have spoke with several representatives and there all saying the same thing, that there is nothing they can provide me with for my lender because I’m in Ibrahim’s and not currently required to make payments? I’m in my home loan process and was never told earlier that this was an issue until now. Of course I’m days from closing, supposedly. Help!
It’s on your credit report. You can pull your credit report for free at annualcreditreport.com
We are in the same situation. It has caused me some heartbreaking this week. However, after three to four different representatives, I finally got one who recommended that I request from Great Lakes Borrower Services something called a “mortgage loan payment obligation letter. She said they do these all the time, but that the bank underwriter has to decide to accept it or not. I just wish this information was known before we’ve wasted three weeks negotiating a contract on a home and looking at paint. I thought that because my IBR amount was 0 that this was ideal. Our house is a small, fixer upper (the one we’d like to buy). It’s not fancy, but we love it. It’s a shame that after teaching 17 years and being able to get a zero student loan payment that now it’s that very thing that is holding up the house purchase process. I pray that this letter from Great Lakes helps us.
Please let me know how this turns out. I found out today I’m in the exact same situation and I’m supposed to close tomorrow.
we are going through is same situation right now. My husband, because of this post, called StudentLoans.gov who advised him that probably his best bet was to take a couple of classes when we get ready to apply for the mortgage which would pull the loans out of repayment. Wouldn’t it still all show up on the credit report however? Doesn’t seem like that would be a good option as it seems it would still show up on the CR as debt.
I’ve had friend who got loans using an Income Contingent instead of Income Based. Would this make a difference at all?
ICR uses 20% of your AGI to base the payments on, so it’s much closer to the standard plan amount, and it can fully amortize the loan before the forgiveness period faster, so it might accept an ICR payment versus an IBR payment (which uses 10% or 15% based on when the loan originated).
Hi! Yesterday this issue came up for me in my loan process. I am set to close on April 24. The first underwriter used my IBR documentation to calculate my debt to income ratio. The final underwriter flagged it for the reasons many mentioned – the payment is set for a single year. Quicken approved an exemption for me and allowed the use of the IBR based on the exemption request that explained that while my payment might increase, it can only increase in proportion to a salary increase and thus the debt to income ratio remains the same. It’s important to note, though, that I have almost no other debts. No car payment and only a couple of credit cards with very low balances. So, I think it’s important that if you have a lot of loan debt you keep your other debts very small. If you are just starting to look at mortgages you could avoid this issue by enrolling in the extended payment plan for a 25 year payoff. My credit report shows my loan payment at 1100 a month but the extended plan only 600. That difference (if I had needed to switch to that plan) would have kept my debt to income ratio in the acceptable range. I’m not sure about other loan servicers, but Fedloan could have had me on that extended plan within 7 – 10 days. I hope my experience helps some of you out there in a similar situation.
Are you on IBR or are you on the Extended Plan? Underwriters will use the Extended Plan payment or will use IBR as long as it fully pays off the loan.
I am on the IBR and it will not fully pay off the loan. The underwriter did flag it for review. Quicken then brings in someone who tries to work with these issues. This person wrote up the exemption request. The way he wrote it demonstrated that as long as I stay on the plan (and who would go off of it unless they could afford the higher payment?) my debt to income ratio will remain the same because the payment is calculated as a % of income. I could have switched to the extended plan if they would not approve the exception. I’m just throwing this out there – I’m guessing that many people on this thread are trying to buy homes in the upwards of 200 thousand range. The house I am buying is only 84,000.
Right, it also depends on the loan type. What type of loan are you getting – my guess is a “non conforming” loan, since they won’t be selling it or using Fannie Mae to insure it.
Thank you! This information helps enlighten me!
Same problem here. I went to citibank for a mortgage 2 years ago when i made 70k/year with 180k debt from graduate school, but i am on the IBR plan (my monthly payments were approx $400/month on IBR at the time)…i live in NYC. The loan officer said that without the debt, he could have given me a mortgage for 280k. But he had to count my 180k in student loan debt against the mortgage loan so could only offer me $100k. This seems totally unfair given that my income would allow me to handle the mortgage payments on 280k and my IBR payments. Again, the mortgage payments would be less per monht than what i am paying in NYC rent every month!! aah!! how is anyone supposed to get ahead these days?
Were you able to figure out a way around this?
So how can we get around these numbers being calculated this way? How can we get mortgage lenders to look at the actual payment?
If you get a non-conforming loan, you might be able to get around it. But chances are slim that you’ll be able to.
What do you mean by a non-conforming loan? How does it work with a Freddie Mac conventional loan?
Fannie Mae and Freddie Mac are conforming loans. Here’s a good explaination: https://en.m.wikipedia.org/wiki/Non-conforming_loan
Has anyone found a lender that will look at PSLF IBR loans? My husband is a mental health counselor, our scores are phenomenal, he works at an agency making $40k a year but his loans cost us $126,000 (didn’t help that his 9 month internship paid a measly $150 per month, I can’t work due to health problems but didn’t qualify for disability (I got sick while a stay at home parent, so even if I am disabled medically I didn’t work enough in the years prior to getting sick to qualify) for master’s degree. We literally have NO OTHER DEBT BUT CURRENT HOUSE, which isn’t bad (and it is canceled out because we’d be selling it and moving). We are trying to get acreage because the one thing I can do is grow garlic (it’s low maintenance and I can work it around my illness attacks) and 2 acres of that will sell for an excellent price ($8 per lb hardneck, 1.2 lbs per square foot yield, can get about 30,000 square feet of it in an acre). Once we have that, we’ll be set.
BUT…in order to get the 5 acres to do it (because I would like to get farm animals as well and sell surplus eggs, milk, etc), we’d either be paying $325k for a house (even a small house on acreage or a manufactured home around here), or we’d be buying land and building on it (owner-builder-having a contractor doubles the cost for us and we’re handy enough between the two of us to get it done in a year-it’s a super simple, small plan).
His IBR payment is only $206 per month. His standard repayment is $1,400 per month. His 1% calculation was $1,600 per month O.o
Hence the issue. We’re literally debt free except our current house (which we bought before he went back to school-he managed to get his 4 year working three part time jobs before we met without debt by living at home), and these blasted student loans. He couldn’t work with a bachelor’s in his field, and master’s classes cost $2,000 apiece NOT COUNTING books. Not to mention, thanks to the stupid internship, we had to take the refunds too because we needed them to live off of while he did his internship (we have two kids too).
I suppose since we already have a house that you all would be blasting me for complaining, but my house is in an HOA that won’t even allow a couple chickens in the backyard (even if the city allows it on “all single family dwellings within the city limits”-yes, that’s how it’s worded), and I only have so much space and can’t grow enough garlic to make much of a dent in our income due to lack of space. I’ve looked into other work from home opportunities but this is the only one I can manage (call center’s about the only reputable thing at home, but sales/telemarketing stressed me out before I got sick (before I had kids), and stress causes attacks so that won’t work, unfortunately).
So I’m basically being forced to turn down the opportunity to make an awesome wage (the garlic- we’ll only ever live off his income so if I have a bad farm year no big deal- just save during the good years, and his will be enough to cover the requisite monthly expenses mine would be retirement, health insurance (his work ins was $1,800 per month so we couldn’t do it), kids’ college, paying off that mortgage asap so we could be truly debt free (aside from the PLSF, but that will be gone eventually too, or if I get enough from a great harvest pay it off then), etc. We’d be in great shape if only I could have the two acres space to get the garlic done.
All because the bank won’t acknowledge that he’s on IBR on a PSLF program 🙁
That sucks. Just like the craptacular wages (if they could even be called that) that an internship pays (though honestly he was lucky he got paid at all).
Someone needs to reword the idiot law that states that interns can be unpaid and just start making them get paid at least minimum wage >:( The law was JUST clear enough that if he met the x, y, z criteria they didn’t have to pay him as an employee- that’s RIDICULOUS. He had to quit his former job with GREAT health insurance because the internship required 40 hours a week and it couldn’t work around the other one, and between that, my illness, and his commute he couldn’t take a second job, and certainly couldn’t work a second full time one! He still had schoolwork to do outside of the internship site that he had to make time for.
The people who make the laws and run this country are idiots…all of them (all parties)…..
Some great news related to IBR and Fannie Mae loans:
“Fannie Mae Unveils New Program For Student-Loan-Laden Borrowers”
“These plans allow graduates to repay student loans based on income. Often, the monthly payment isn’t enough to pay the interest owed.”
IBR, so long as it appears on the credit report, will be factored into DTI instead of 1-2% of the loan, or the fully amortized amount.
https://themortgagereports.com/27673/mortgage-approvals-get-easier-for-mortgage-applicants-with-student-loans
Thank you so much!!!!
Thank you so much for posting this link!!!
Thank you all so much for your insight. I thought I was the only one dealing with these issues and felt embarrassed to talk about it. After reading all of the information and comments I now feel more confident going forward.
It does help to know I’m not alone too! It was frustrating hearing this from lenders, but now I know that others are going through the same thing. This let’s me know there has to be a solution if we stick together, keep sharing our story, and complain to the right people.
Robert, I appreciate both your detailed coverage of the subject and your responsiveness in all the comments (which is so rare these days).
I have both a gripe and a question; apologies in advance for the gripe!
It’s clear that there was a flaw in the system that (if the Fannie change holds up) needed to be addressed. I just hope other lenders take heed. I’m certainly not suggesting we go back to the “bad old days” and abandon analytics completely, but the system either needs to account for the many ways someone can (prudently) work toward long-term financial success, or loan officers need more flexibility and discretion in evaluating applicants.
Absent wide changes like Fannie’s recent accepting of IBR, the system is patently unjust for two reasons, both of which have been referenced in the comments (although one wasn’t fully explored):
1. Those on an IBR plan should not have an inflated, unlikely-to-ever-happen monthly payment impacting their DTI because (barring one caveat* I’ll address at the end), an increase in their payment will correspond to an increase in their income, thus making most such increases a wash in the calculation. I understand that underwriting formulas exist to manage risk and determine an ability to repay, but what good is are criteria that speculate about future payment changes (the numerator) while ignoring the fact that those changes are driven by changes in the income (denominator)? I respect not only Robert’s knowledge (and engagement with readers), but his perspective in seeing multiple sides of this issue. But when he suggests that those on IBR “cannot afford a mortgage because you cannot technically afford your student loan payments,” that’s an overly simplistic view of student loan debt (and repayment) that is blind to the fact that higher payments mean higher income.
2. Forgiveness needs to be accounted for as an asset. The status quo is particularly problematic for those with PSLF. Most IBR loans are forgivable after 25 years, but PSLF is drastically shorter (10 years) and many PSLF borrowers are nearing the finish line. Thees are folks who made long-term choices (not just in career, but in taking on that debt in the first place) because our country chose to incentivize relatively lower-paying jobs through PSLF. I’m good at what I do, and am OK living comfortably (but not lavishly) because it’s rewarding. I could’ve gone corporate and made a bundle, but I’m happy where I am. In fact, I max out my 403(b) and Flex contributions to keep my AGI (and loan payments) low, and turn down extra teaching in order to publish and maximize my long-term earning potential. Plus the nest egg gives me down-payment flexibility. I know the ~$100k I borrowed to pursue this path will be forgiven in 8 years. To hold a to-be-forgiven loan debt against borrowers like me doesn’t just constitute shady actuarial science, but it’s unjust social policy. If that debt goes into the equation because it impact the risk I cannot pay my mortgage, then the probability of forgiveness should go in the equation as well.
Robert, I know you neither made the rules nor are fully defending them, but there are times that I feel a bit uneasy with the way these issues have been addressed. There’s a connotation to “I can see where you don’t think it’s fair, but as a lender trying to assess your ability to repay, you technically can’t afford your student loan debt and need a special payment plan. Why should they give you a mortgage?” Not only *can* we afford our student loan under the rules of the game, and will continue to be able to afford them if our rising incomes push up our payments, but it hurts when the system is ignores the realities of student loan forgiveness and essentially devalues responsible people trying to build their lives that they should wait, be renters for years while going through the motions, or “earn more side hustling or freelancing.”
*The Caveat: Yes, things can happen. And banks have to manage risk. A borrower with student loans could brain-fart and get put back on a standard plan by failing to recertify. Zombies could take over Australia, too. But while they’re doing that, the borrower could realize their error and still recertify. If banks are (understandably) wary of risk, why aren’t they willing to investigate that risk and account for it? Why enter a number into the equation just because it shows up as debt, when in reality the borrower can show you that they’re 2.5 years from having it forgiven?
Plenty of folks without student loan debt (or in higher-paying jobs) carry with them much more risk. They’re less educated and are less insulated from fluctuations in the labor market (read: we get tenure). The assets they declared on their application could shrivel up with a stock market crash. They could rack up credit card debt. Risk is everywhere.
Anyway, I apologize for the rant. I really appreciate how informative this thread is, and Robert’s responsiveness.
I appreciate your point of view. I can’t speak to why they have the rules they do, only that they exist. I do, however, see why forgiveness programs aren’t counted – there are too many variables along the way to account for them.
For PSLF, it requires 120 individual qualifying payments. That’s hard to quantify the risk today (will the borrower stay in a non-profit for the duration)? According to the Bureau of Labor Statistics, the average 40 year old has held 10 different jobs – that averages to about one every two years from 20 to 40. I think there is risk there.
Second, and a lesser risk, is legislative changes. This could happen, although it may be subject to lots of legal challenges.
I’m definitely not trying to over-simply things, this is an incredibly complex subject that I’ve spent a lot of time dealing with. However, for many readers, keeping it simple is appreciated.
Robert,
Thanks again for your help. This is really an important conversation for so many people trying to juggle loans, jobs, smart financial planning, and the realities of the current system.
Everything you’ve listed is a valid factor (although I’d argue the risk could be remote, depending on circumstances). And you’re right to that keeping it simple for readers is a desirable end (which is why I love that you expand on things in the comments for those who wish to dig deeper or have unique circumstances; thanks again!) Still, I’d like to point out two things, the need for accounting for IBR and for forgiveness programs:
1. It looks like the Fannie guidance on counting IBR in back-end DTI is legit, and that’s great. Without it, some extremely qualified borrowers are left out in the cold, with often wildly misleading DTI percentages that can shoot up 20+ points even in “no way that’ll ever happen” situations.
Take an not-so-extreme edge case: a two-income, recently tenured (i.e. they’ve been in their jobs 6-8 years and are now extremely secure) academic couple earning $160k wants to settle into a reasonably priced home ($300k) in an expensive college town, and can put 30% (!) down. They have exceptional credit, long-term (403(b)) savings, and job security. They are each ~2 years away from PSLF forgiveness. I ran the numbers a bunch of ways, and their front-end PITI is sparkling (< 10%), but even with frugal living in all the other back-end areas (<$750/mo. in car+credit card payments), the "classic" 36% threshold gets obliterated if the couple has a high paper balance on their student loans (~$300k). At ~$400k, even the new FHA 43% cap gets passed.
I know these seem like high amounts, but for two people with advanced degrees, it's not unheard of. At $80k/each in income, it's easy to get their AGIs down to the point where they're paying ~$700/mo. combined in student loan payments. This gets their real DTI back-end down to a fantastic 20%. The 1% rule (which is lower than standard repayment in this case) would have them at a whopping $3,000-$4,000/mo., depending on balances.
2. As to forgiveness and the risk of that not happening, I agree that it's a more complex calculation and applies to fewer people (and has a lower DTI impact given the IBR acceptance change), but I'm still baffled the industry can't figure something out. Gauging risk it what the industry is about (i.e. FICO scores, the reasoning behind DTI front-end and back-end ratios), so relying on rigid models to reduce lender discretion is insane if that actually distorts risk calculations. They need a safety valve to bring them closer to reality.
I'm a rare humanities wonk who likes to play around with numbers (e.g., I'm a sabermetrician), but this is an area where if the actuaries can't figure it out, then more discretion needs to be given to those approving mortgages to guesstimate the likely DTI and probability that someone is headed for forgiveness (or even just remaining on an IBR, frankly). They've got models to guess your likelihood of dying based on whether you blot the grease off your pizza, so why not a sliding scale based on loan debt, # of payments left, length of time in job, etc.? These careers tend to have more security and less of a path to the for-profit sector (hence less of the turnover you referenced), and the probability of the guy in the White House tweeting away PSLF is extremely remote (the political consequences would devastate anyone reneged on forgiveness) and legally shaky.
If they can't account for forgiveness (even when it's a near-term probability), and if they're that worried about a borrower ditching IBR, perhaps some sort of rider or mortgage insurance product can serve as a patch.
Anyway, I've mused long enough. Thanks again for all your great information and for helping so many concerned folks dealing with student loan debt.
Woops…I forgot the question!
What are the chances private lenders will adopt the new guidance from Fannie, or at least given loan officers more flexibility in evaluating the IBR/income dilemma–or better yet, accounting for loan forgiveness?
Had anyone had success with private lenders and IBR?
I’ve yet to encounter a private lender that offers an income-based repayment program. Private lenders act more like car loans or mortgages, in that they offer few repayment options, and they are more likely to sue borrowers for unpaid debts quicker in order to get a judgement to collect.
Robert,
I think I was unclear. I didn’t mean private student loans. I was referring to private mortgage policies adopting Fannie’s new guidance for calculating student loan payments as part of back-end DTI. Do you think there’s a good chance this will become an industry standard, soon? Or, as you wrote in your post, are we going to have to shop around a lot and “educate” loan officers?
My mistake on the ambiguity.
Thanks again
I “hope” so. What I think it would require is a more long-term standardization of repayment plans to give lenders a better baseline of things. Instead of the limbo around changes, if Congress and the President could stop changing things and create a more stable program, I think this will expand.
I feel so discouraged reading all of this. I have about 67k in federal school loans. My payment plan is the graduated extended, which means my monthly repayment amount will increase by a small portion every 2 years for 25 years. Right now, it’s at 325/mo. My boyfriend and I will soon be making about 100k combined and will be trying buy a house with a relatively small down payment (around 25k for a 240k house). We have no other debt but he has no credit at all while my score is currently 723. I’m just wondering if this will even be possible given all of our information. 🙁
The extended plan fully pays off the mortgage, so you should potentially be able to qualify for a mortgage with your payment, as long as you can get your DTI to less than 43% or so. Also, you have to boost that credit score up!
A 723 is not a good credit score? I’ve never heard that before. I really feel marginalized and disenfranchised at this point. Time for me to get off the internet.
723 is good, not excellent. The best mortgage rates will go to borrowers who have over 760 scores. Here is a breakdown of scores: http://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/
My wife and I have $300k in student loans ($80k for me and $220k for her as she just finished med school), and our income just jumped from $75k to $200k. We were both exceptional students but from poor families, and we feel like we basically bought/borrowed our way into upper-middle class, white collar careers we wanted. But even on $200k, we can’t find a lender willing to lend. Our IBR payments are $1,800, which would qualify us for $500k-ish, but the 1% rule of $4,000 knocks us completely out of qualifying for anything.
Are we destined to be cash rich/wealth poor and have to rent for the next 25 years?
Hey Zach, you have to remember that you went to med school and your income will rise significantly over time. It might be a struggle to get a mortgage today, but not in 5-10 years. Furthermore, you can use that cash to save and invest – so there is no “wealth poor” here.
You could also pay off your student loans faster, look into refinancing at some point in the future, or even save to purchase a home for cash.
Very few doctors I meet stay below their standard repayment plan amount for more than 5 years.
I was set to close tomorrow and found out today after receiving a call from the lender that one of my student loans was reported with a $0 balance on the report they pulled when I was first pre qualified. Now ONE day before closing they reviewed my updated credit report and see that my student loan balance puts my DTI over the amount to be approved. Needless to say I am devastated since I will loose several thousands in earnest funds, not to mention inspection and appraisal fees. I look at my credit reports often and I’ve always seen ALL my student loans reported. They are saying this was a “fluke” from when the loan went from one servicer to another and the new servicer had not yet reported my loan balance. I’m currently on an IBR and IDR plan for my loans but the 1% they look at is way more than I pay. Loans were my only option for obtaining my college degrees. Now I make almost 100K a year and still can’t buy a home.
Thank you for this advice. I too have an IBR and was declined by a lender for a mortgage for the same exact thing that was mentioned. I have zero dollars a month payment, a fair credit score, yet a high debt ratio. I will also hit up lending tree.
Thank you,
LaTasha Ursin