Deferred Student Loans & a Home Loan

Deferred Student Loans Alternate Solutions

Deferred Student Loans Alternate Solutions

If you have had the misfortune of having a student loan payment derail your home loan pre-approval, do not give up yet!  Far too many mortgage lenders do not keep up with the rapid changes with student loans.  Whether it be on a Conventional Loan, FHA Loan or VA Loan there are multiple methods a lender can use to determine what student loan payment needs to be counted against you.   Lets look at Conventional Financing and how to get through student loan trouble.

Deferred Student Loan Mortgage Trouble?

With all the changing regulations, how to calculate student loan payments on a home loan application can get overwhelming.  More specifically, we are talking about deferred student loans.  The issue usually arises when a student loan reports as “deferred” and shows no minimum monthly payment due on the credit report a mortgage lender generates.

Now that no home loan type (except for VA) will allow deferred student loans to be excluded from a borrower’s debt to income ratio, a minimum monthly payment MUST be calculated and factored into each pre-approval.  This is where some pre-approvals are unnecessarily driven off the cliff.   Why would a loan officer yank the wheel of a shiny new pre-approval and plunge it into decline valley you ask?  The short answer – “the 1% rule and lack of effort.”

Is the 1% Rule Your Only Option?

One of the methods (not the only one – see below for more) that mortgage lenders can use to calculate a deferred student loan payment is the 1% rule.  The 1% rule is expensive and is only useful if there is room in the borrowers debt to income ratio.  After all, its super simple for a loan officer to use this method.  It also saves everyone time and effort.  All a lender must do is multiply the outstanding deferred student loan balance by 1%.  The result is a monthly payment figure that underwriting will accept.  Example:

Student Loan Balance: $50,000  X   1%  = $500 (monthly payment used to qualify borrower)

If the borrower in the above example can add $500 to their debt load and stay under maximum debt to income ratio limits, this is a quick and convenient method.  However, what if adding $500 in monthly debt pushes a borrowers debt to income ratio up and over the max?  Well, there is good news.  There are other min payment calculation methods that typically result in a lower monthly student loan payment payment that underwriting will accept.

Additional Deferred Student Loan Methods

Great news!  Conventional Financing offers several additional acceptable methods for lenders when they are calculating minimum monthly payments for deferred student loans.

I. Fully Amortization Method:

Lenders can calculate minimum deferred student loan payments by figuring out what payment pays the balance of the loan off.  Provided lenders use acceptable amortization terms and relative/current student loan interest rates, this option is acceptable and often results in a lower payment than the 1% rule.

II. Income Based Repayment Method:

Home Loan lenders can also hold the income based repayment plan payment as the minimum payment for deferred student loans.  Oftentimes, income based repayment plans are much lower and can help a borrower who is stuck in student loan/mortgage pre-approval misery!

III. Minimum Payment Due Method:

This method isn’t rocket science but, it can still help home buyers reach their home buying goals.  If the deferred student loan servicer will document what the minimum payment will be on the deferred student loan and that payment will pay off the student loan based on the loans terms it may be used for mortgage pre-approval purposes.

More Than 1 Way to Calculate A Deferred Student Loan

Make sure you are working with a home loan lender that has an up to date and in depth knowledge of current deferred student loan regulations and options.  There are many ways to try to work with student loans.  The spectrum between the 1% rule payment and some of the alternative methods above payments is often vast can make the difference between home loan approval.

By Jeremy House

 

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Jeremy is the Founder of The HOUSE Team and a Sr. Loan Officer/Branch Manager with PrimeLending. Over the past several years he has ranked in the top 1% of all loan officers nationwide and one of the top 200 loan officers in America. In the mortgage industry, the devil is in the details. Jeremy prides himself on being a student and an expert when it comes to everything mortgage related.

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