A large student loan that is on an income-based repayment plan will not stop you from buying a home. A smart lender will only count the IBR payment when calculating the debt ratio.

The frantic email comes in at least once a week, sounding similar to this one,

“Hi, I got your info from the website. I am under contract and after weeks today is the end of the financial contingency. all of a sudden the student loans are an issue and it is putting me wayyyy out of my DTI. they told me that they could use the IDR and now they can’t.”

So, we get to work to help this home buyer to actually close on the home using their Income Based Repayment amount.

And, here’s the rule, just so you know it. FHA and USDA loans always calculate the debt ratio using 1% of the student loan balance, or the fully amortizing payment. You cannot use your IBR payment in the debt ratio calculation for those loan types.

The opposite is true, however, for conventional (i.e. Fannie Mae) loans and for VA loans. A conventional home loan, as well as a VA home loan, use the documented Income Based Repayment amount for the debt ratio – even if that IBR payment is $0.

So why do many lenders tell you that cannot be done?

I hear it weekly, that another lender told a home buyer that they always have to count 1% of the outstanding balance in the debt ratio calculation. And that pushes the ratio too high, and the home buyer no longer qualifies.

Some assume that the loan officer just doesn’t know the guidelines, so he is just repeating what they believe to be true, but have not really looked up guidelines. And, of course, that may be the case for some. Others insist that the underwriter just wants to dig in and flex her power muscle and deny the loan, just because she can. Also could be true in rare instances.

I believe that the majority of those who deny the ability to qualify using only the IBR payment is not ignorant nor spiteful, but they have limited outlets to sell the loan post-closing.

Stay with me here. Lenders who sell the loan direct, to Fannie Mae or Freddie Mac, can then follow the rules set out by those institutions. That is a Direct Lender – because the lender sell direct to Fannie and Freddie. Another type of lender – the one I believe most often says ‘no’ to using IBR payments to qualify – is a correspondent lender. They don’t sell their closed loans directly to Fannie or Freddie Mac. Instead, they sell loans to another aggregator lender, say Wells Fargo or Chase or a myriad of other names less well-known.

And if they are correspondent, then they have to underwrite to any ‘overlays’ that the purchasing lender may impose…such as always counting 1% of the student loan on all loans. And, your student loan throws a wrench in your homeownership dreams. Bummer.

So, you will find success in applying for a conventional or VA home loan when your student loan is on an IBR payment, even if the payment is $0.

So if you want to buy a home but are worried about your student loans squashing your dreams; then be sure to work with a direct lender. If my team and I can help, we will be happy to help you achieve your dream of owning a home, while just working with your Income Based Repayment agreement on your student loans.