Written By: Carlotta Emperator, Op-Ed Writer
Many borrowers have deferred student loans. A deferment, like forbearance is a temporary suspension of the obligation to repay a federal student or parent education loan. In order to qualify for a home mortgage, these obligations were being “omitted” or calculated incorrectly. Therefore, the borrower’s ratio would be affected based on the mortgage product.
In the past, several mortgage products stated if the payment was deferred at least 12 months from the mortgage note date, then the student loan debt could be “omitted” from the borrower’s ratio for qualification.
What are the guidelines per mortgage product when trying to qualify a borrower that has a deferred or forbearance student loans?
Federal Housing Administration (FHA)
If a borrower wants to apply for a Federal Housing Administration (FHA) loan and their student loans show “deferred” on their credit report, the mortgagor can follow the newly issued Mortgagee Letter 2016-08 immediately or for all new loans with FHA case numbers assigned on or after June 30,2016.
The old guidelines stated that each student loan listed on the credit report required the lender to calculate a monthly payment using one percent of the outstanding balance. The new policy effective now or with case numbers assigned 6/30/2016 or after has reduced this to one percent of the outstanding balance to be included as a payment in the borrower’s debt-to- income ratio for qualification.
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Department of Agriculture (USDA)
If the borrower has a student loan that is deferred and plans on obtaining a USDA loan, the lender must include the greater of the following:
• One percent of the outstanding loan balance, OR
• The fixed payment as reflected on the credit report. Income Based Repayment (IBR) plans; graduated plans, adjustable rates, interest only and deferred plans are examples of repayment plans that are subject to change and do not represent a fixed plan payments. These types of repayment plans are unacceptable to represent a long term fixed payment plan.
Fannie Mae (Conventional)
Deferred installment debts must be included as part of the borrower’s recurring monthly debt obligations. For deferred installment debts other than student loans, if the borrower’s credit report does not indicate the monthly amount that will be payable at the end of the deferment period, the lender must obtain copies of the borrower’s payment letters or forbearance agreements so that a monthly payment amount can be determined and used in calculating the borrower’s total monthly obligations.
As of May 31, 2016 the following was revised and updated to the Selling Guide.
The lender must use one of the options below to determine the repayment amount:
• One percent of the outstanding balance;
• The actual payment that will fully amortize the loan(s) as documented in the credit report, by the student loan lender, or in documentation supplied by the borrower;
• A calculated payment that will fully amortize the loan(s) based on the documented loan repayment terms; or
• If the repayment terms are unknown, a calculated payment that will fully amortize the loan(s) based on the current prevailing student loan interest rate and the allowable repayment period shown in the table on pages 551-552 of the Selling Guide.
The “current prevailing student loan interest rate” can be found on a variety of websites. For example, see U.S. Department of Education Federal Student Aid in E-1-03, List of Contacts.
Veteran Administration (VA)
If student loan repayments are scheduled to begin within 12 months of the date of a VA loan’s closing, lenders should consider the anticipated monthly obligation in the loan analysis. If the payment is due within 12 months then the following guidelines apply:
• Two percent of the outstanding balance OR
• Use the amount listed on the credit report which is the minimum due.
If the borrower is able to provide documentation that the debt will be deferred for a period outside that timeframe, the debt need not be considered in the analysis.
It is the lender’s responsibility to ensure the correct fixed payment is utilized in the capacity analysis for the borrower’s debt-to-income ratio. Failure to follow the appropriate guidelines for the borrower can result in denial of the loan approval which in turn delays the home buying process for the customer. Therefore, it is imperative to reference the different guidelines when trying to qualify borrowers whose student loans are currently deferred or in forbearance.
About The Author
Carlette Emperator a native of the sunshine state, Florida has an extensive background in the mortgage industry. With 20 plus years of experience, Carlette has held the title as a manager for closing, processing, and underwriting departments at several different organizations. Her ability to be a leader, a colleague, and a mentor has allowed her to continue to thrive within the mortgage industry leading her to become an instructor at Mortgage University. Currently she is a full-time Senior DE/SAR Underwriter for a major lending institution. Carlette is the mother to a 26 year old daughter and a 21 year old son. She is currently engaged to her longtime friend. In her spare time she loves to travel, spend time with family, and decorate her home in Atlanta, GA. Excited to have joined the Mortgage University Family she looks forward to working with all students and faculty.
