Student Loans

The Obama Administration introduced the income based repayment program (IBR) for student loans.  This allows borrowers of federal student loans to set their monthly repayment amount based on their income rather than making an amortizing payment.

(An amortizing payment would be one that is set to be paid off in the allotted term of the loan, and covers the necessary interest as well.  Therefore the monthly payment for this loan is of course based on your loan balance, loan term, and interest rate).


There is also the public service loan forgiveness program.  This allows borrowers of federal student loans to have their debt be forgiven after ten years of qualifying public service work post-school.  This would include non-profit and government employment.


Thanks to the existence of these programs, many borrowers have chosen to make only the income based repayment minimum rather than the fully amortizing payment.  This potentially reduces their required payment and will extend the term of their student loans.

It’s important to understand how your student loans affect your ability to qualify for your mortgage.  How it affects your qualifying ability depends on which loan program you select. Make sure to check out this link for info on calculating your debt to income ratio.

There are four primary loan types:

Fannie Mae and Freddie Mac conforming conventional financing

VA Loans

FHA Loans

Each of the loan types analyze student loan payments differently.

  1. Conventional loans – Fannie Mae.  This conventional conforming loan type will allow us to use the monthly payment shown on your credit report for qualifying.  However if the monthly payment is $0, then:
    1. If the applicant documents that they are under the income based repayment program with a $0 required payment, that is the payment we use.
    2. If the applicant is not under income based repayment, then we can use either the fully amortizing payment or a payment that is 1% of the balance.
  2. Conventional loans – Freddie Mac.  For student loans in repayment, we calculate the greater of either:
    1. The reported monthly payment amount
    2. The greater of .5% of the original loan balance OR current loan balance.  So in most cases, the payment would be off the original loan balance…unless the current loan balance exceeds the original balance.
      1. For student loans not in repayment (forbearance, deferral) we must calculate the payment at 1% of the balance or the reported payment, whichever is greater.
  3. VA Loans.  This loan type which is veteran-only will allow us to use the payment reported to the credit bureaus, provided the applicant submits their student loan statement.  If we do not have the student loan statement and if the reported payment is less than 1/12th of 5% of the outstanding balance, then we will use 1/12th of 5% of the outstanding balance as the estimated monthly payment.  However if the student loan is deferred for more than one year post-closing, we do not need to consider a payment whatsoever.
  4. FHA Loans.  FHA will require that we either use a fully amortizing payment or a monthly payment estimated at 1% of the balance.


So – the conclusion is that if you have a reduced monthly payment plan for your student loans, then conventional conforming financing will be the preferred loan program if you qualify.  If you read the above links which provide more information on the loan programs, you’ll know that while it is easier to qualify for an FHA loan than a conventional loan generally speaking, if you are on an income based repayment program with a great deal of student loan debt, then FHA financing may not be an option.  If you are applying for a jumbo loan (greater than $679,650) then you should expect the estimated payment to be 1% of the balance.

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