Deferred Student Loans on a Home Loan

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Has a deferred student loan derailed your home loan pre-approval?  Do not give up yet!  Many mortgage lenders are dazed and confused by the many recent changes with deferred student loans.  Whether it be on a Conventional Loan, FHA Loan or VA Loan there are multiple methods a lender can use to calculate deferred student loan payments on a home loan application.

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Deferred Student Loan Mortgage Trouble?

Calculating and omitting student loan payments for a home loan application can get confusing.   What is allowed?  What is not allowed?  Deferred student loans can be especially problematic if your lender is not up to date with the latest student loan rules for each loan type.  Student loans reporting “deferred” cause a significant fork in the road between logical assumption and actual procedure.

Currently the only home loan type allowing lenders to omit eligible deferred student loans is a VA home loan.   All other home loan type do not allow a pure omission of deferred student loan payments.   You see, unlike that student/borrower the investors know that someday those loans will become due ;).

On on VA home loans, some sort of minimum monthly payment MUST be calculated and included into a borrowers debt to income ratio.   However, that payment can be $0.  Clear as mud right?  See below for more.

Is the 1% Rule Your Only Option?

Mortgage lenders can use the “1% payment rule” to calculate deferred student loan payments.  The 1% rule is expensive and typically only useful when dealing with a very low debt to income ratio borrower.  All lenders do is multiply the outstanding deferred student loan balance by 1%.  The result is a monthly payment that underwriting will accept on certain loan types.

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

If adding a $500 payment keeps this borrower under maximum debt to income ratio limits the 1% rule is the way to go.  What if adding a $500 payment pushes a borrower’s debt to income ratio over the maximum allowed?  Step 1 – don’t use 1% rule. Step 2 – keep reading…

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Deferred Student Loan Payment Calculations Options

Conventional Financing offers different options for lenders to calculate a payment for deferred student loans.

I. Fully Amortization Method

Lenders can calculate minimum deferred student loan payments by calculating a payment that pays the the loan off.  Acceptable interest rate and loan term variables must be used. Often this results in a lower payment than the 1% rule.

II. Income Based Repayment Method

Home Loan lenders can also use the payment outlined in a borrower’s “Income Based Repayment Plan” (or IBR).  The best part – the lender can use $0 if that is what the borrowers Income Based Repayment plan states.

III. Minimum Payment Due Method

Deferred student loan servicer provides the minimum payment that will when loan come out of deferrment.

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Ways to Calculate A Deferred Student Loan Payment

The HOUSE Team is up to date with current deferred student loan requirements.  There are multiple options to work with deferred student loans.  The variance between the 1% rule and $0/month IBR payment illustrates how vast the gap is between these different options

By Jeremy House


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