USDA has long seen the benefit of a College Degree – and in fact USDA Home Loan Underwriters will use Higher Education as a “compensating factor” when a family is close on the debt ratios! Unlike FHA and VA home loan underwriting, though, the no money down home loan programs offered through USDA COUNT deferred Student loans IN the total debt ratio. Qualifying for USDA Home Loans when you have Student Loan Debt is not impossible - it's just a different process than you might see with other Mortgage Loans.
Student loans come in two classes: deferred and not deferred. And one thing to keep in mind when looking at the USDA Home Loan Program is that it does treat student loans differently than the other loan programs available. At first glance you would intuitively think that a deferred student loan would not be considered in qualifying for your new home loan. With FHA Loans and VA Home Loans - we don't count them.
Recently, USDA Home Loan Underwriters announced a slight change, because of a new type of Deferred Student Loans. One type of deferred Student Loan is the “traditional” set payment each month… the NEW type of Student loan is based upon Income, and is scheduled to change on an annual basis.
This new change is CRITICAL – and important to understand if you have an Income Based Repayment plan on your Student Loans and you want to qualify for a USDA Home Loan!
Please note in the directive that USDA Home Loan Underwriters are looking for DOCUMENTATION of what the payment schedule is going to be, and that is something that you should begin trying to gather early in the mortgage loan process.
STUDENT LOANS AND DEBT-TO-INCOME RATIOS:
Income Based Repayments and Deferred loans
Student loans are long-term liabilities that must be included in the debt ratio calculation per RD Instruction 1980-D, section 1980.345(c). Because some student loans are not on fixed payment plans, the repayment amount due may increase or decrease without regard to additional liabilities incurred by the borrower. Therefore an accurate monthly liability amount for this payment must be included in the debt ratio when qualifying the applicant for a long-term mortgage obligation.
All student loans must have documentation to verify the current payment due (e.g. letter from a loan servicer, online account verification, etc.). Verifications are valid for 120 days, 180 days for new construction.
Student Loans: Conventional/Fixed Payment/Deferred:
· Lenders may review the account statements and use the fixed monthly payment due (no adjustable payments).
· Deferred student loans that are not in repayment status must use an estimated payment of 1% of the loan balance, or a verified fixed payment provided by the loan servicer to document the payment that will be due. (READ: We will need help getting this documentation for the USDA Home Loan Underwriters regarding what TYPE of Student Loan you have in Deferment, AND that it will be paid back in “consistent” monthly payments that don’t change.)
Student Loans: Income Based Repayment (IBR):
· IBR amounts are not fixed payments and may increase annually.
· IBR payments of $0 are not eligible to be used in the debt ratio.
When an applicant provides documentation of an IBR agreement and payment from the loan servicers the following apply:
1. If the IBR payment is less than $100 and 1% of the total loan balance is more than $100, a minimum payment of $100 must be included in the debt ratios. (READ: Even if you are only being charged $22 a month, we are going to COUNT $100 a month for that debt!)
2. If the current IBR payment is over $100, lenders may use that payment amount in the debt ratios.
We’ve seen several of the IBR cases recently, and with this NEW underwriting clarification, it would mean (in one case) that we are going to count $400 a month for the homebuyers 4 different student loans – when in fact, they are only being CHARGED $89 TOTAL for the 4 loans. This could be a significant deterrent in qualifying!
We’ve also put together a guide for Recent College Graduates Looking for Their First Home.
If you have not owned a home in the last 3 years – then you might qualify for the NC First Time Homebuyers Grant Program through NCHFA. This program offers a 3% Grant that can be used for down payment or closing costs. The minimum credit score required for the Tax Credit or the Grant program is 640. This means that 2 or your three credit scores need to be at or above 640 to qualify for the program.
Have questions about the USDA Student Loan Policy, or qualifying for one of the no money down home loan programs - please call Steve and Eleanor Thorne, NC Mortgage Experts 919 649 5058. We love helping folks buy their dream home!