Did you know that the US Department of Education is requiring borrowers to start making payments on COVID relief deferred student loans this October?
Please see the attached Conventional and Government guidelines regarding student loan payments and let us know if you have any questions.
GOVERNMENT LOANS
FHA
We may exclude the payment from the Borrower(s) monthly debt calculation when written documentation from the student loan program, creditor, or student loan servicer is provided to indicate that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.
FOR OUTSTANDING STUDENT LOANS, REGARDLESS OF PAYMENT STATUS
- The payment amount reported on the credit report, OR
- The actual documented payment, when the payment amount is above zero. Written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the credit or student loan service is required, OR
0.5% of the outstanding loan balance, when the monthly payment reported on the Borrower’s credit report is zero.
VA
If the student loan repayment is scheduled to begin within 12 months of the date of closing, we must consider the anticipated monthly obligation in the loan analysis. If the borrower can provide evidence that the debt may be deferred for a period of time outside that time frame, the debt does not have to be considered.
- Determine the “threshold” payment of 5% of the outstanding loan balance divided by 12
- If the payment on the credit report is higher than the threshold payment, then use the payment shown on the credit report,
- If the actual payment is lower than the threshold payment, we may use it IF the veteran provides a statement from the loan servicer (within 60 days of loan closing) documenting the terms and loan payment. (Servicer website may be used, provided the URL is shown.)
- If the payment is to be deferred we will not count the payment if it is deferred for more than 12 months from loan closing. Written documentation will be required.
- (example: $25,000
student loan balance x 5% =
$1,250 divided by 12 months = $104.17 is the monthly payment for debt ratio purposes)
USDA
- Student loans in the applicant’s name alone but paid by another party remain the legal responsibility of the applicant. The applicable payment must be included in the monthly debts.
- Student loans in a “forgiveness” plan/program remain the legal responsibility of the applicant until they are released of liability from the creditor. The applicable payment must be included in the monthly debts.
We must include the required payment as applicable:
Fixed payment loans:
A permanent amortized, fixed payment may be used in the debt ratio when we retain documentation to verify the payment is fixed, the interest rate is fixed, and the repayment term is fixed. The fixed payment will fully amortize/pay in full the debt at the end of the term.
Non-Fixed payment loans: Payments for deferred loans, Income Based Repayment (IBR), lncome Contingent (IC), Graduated,
Adjustable, and other types of repayment agreements which are not fixed must use:
- The current documented payment under the approved repayment plan with the creditor, when the payment amount is above zero; OR
One half (.50) percent of the outstanding loan balance documented on the credit report or creditor verification, when the payment amount is zero.
CONVENTIONAL LOANS
FANNIE MAE
For all student loans, regardless of whether the loan(s) are in deferment, in forbearance, or in active repayment (not deferred), we must include a monthly payment when qualifying the borrower. There may be times the amount used to qualify the borrower is $0. In all cases, we MUST use one of the options that are listed below.
IF PAYMENT IS ALREADY ESTABLISHED OR PAYMENT IS TO BEGIN WITHIN 12 MONTHS
- If a monthly student loan payment is provided on the credit report, we must use that amount for qualifying purposes
- If the credit report does not reflect the correct monthly payment, use the monthly payment that is on the student loan documentation (the most recent student loan statement)
- If the credit report does not provide a monthly payment, or if the credit report shows $0, we must determine the qualifying monthly payment using an option below:
- If the borrower is on an income-driven payment plan, we may obtain student loan documentation to verify the actual monthly payment is $0. We may then qualify the borrower with a $0 payment, OR
- We may exclude the payment from the ratios if we have 12 months of canceled checks from the party paying 100% of debt, as long as there are no delinquencies. It cannot be interested an party to the transaction.
IF THE PAYMENT HAS BEEN DEFERRED OR REDUCED
For deferred loans, reduced loans, or loans in forbearance, we may calculate based on one of the following two options:
- A payment equal to 1 % of the outstanding student loan balance (even if this amount is lower than the actual fully amortizing payment), OR
- A fully amortizing payment using the documented loan repayment terms OR
We may exclude payment from ratios if we have 12 months of canceled checks from the party paying 100% of the debt, as long as there are no delinquencies. It cannot be an interested party to transaction.
FREDDIE MAC
The student loan payment may be excluded from the monthly DTI ratio provided we have documentation and circumstances as required in the “Forgiveness, Cancellation, Discharge & Employment Repayment” section below.
STUDENT LOANS IN REPAYMENT, DEFERMENT OR FORBEARANCE
- If the monthly payment amount is greater than zero, use the monthly payment amount reported on the credit report or other file documentation, OR
- If the monthly payment amount reported on the credit report is zero, use 0.5% of the outstanding balance, as reported on the credit report.
FORGIVENESS, CANCELLATION, DISCHARGE & EMPLOYMENT-CONTINGENT REPAYMENT
- If the student loan has ten or less monthly payments remaining until the full balance is paid, OR
- The monthly payment on the student loan is deferred or is in forbearance and the full balance of the student loan will be forgiven, canceled, discharged, AND
- The Borrower currently meets the requirements for student loan forgiveness, cancellation, discharge or is in an employment repayment program, and we are not aware of any circumstances that will make the borrower ineligible in the future.
Evidence of eligibility or approval must come from the student loan program or the employer, as applicable.