In this edition of the student loan plan, we take a deep dive into how chasing Public Service Loan Forgiveness can influence your ability to buy a house.
User Vickim34432 asked about the best strategy for qualifying for Public Service Loan Forgiveness. She also wants to buy a house and is curious about how these goals come together. If you want tips for dealing with your student loans, contact the Sherpa.
There is extensive information about qualifying for Public Service Loan Forgiveness and about getting a mortgage with student loans. Today we will be taking a look at how borrowers can work towards these two goals at the same time.
The Reader Question
The full text of Vickim’s post is available below. Those looking to jump right into the issue can jump down to the next section.
My loans are set to come out of deferment in May. I may be able to apply for deferment again, but I don’t think I need to. Long story short, I was the first in my family ever to attend college, and learning came very naturally to me. As a young 17-year-old in college (emancipated), I signed whatever form they put in front of me. This was great! I was getting an education! Fast forward years later and 3 degrees later……. I am in debt for $177k. As a 30 something, I now realize oh my, all those forms I signed… I have to actually PAY for. The good news is I work for a 501, which qualifies me under the PSLF program (thank god…) I have done nothing to my loans. I want to start repaying them under IBR ($125/mo) so that my work history will start counting towards the 10 years of qualifying payments and eventual forgiveness. However, we also just started looking at purchasing our first home….
The first mortgage broker I called (Regions bank in Florida, where I live), literally LAUGHED at me. Why? My student loans. He said a bunch of things I honestly didn’t (don’t) understand, but essentially as they were in deferment, he had to count 1% of my overall loans, which he estimated at 200k (not true, its 177k…) so my DTI starts at almost 60%… The only other debt we have at all is a car loan which will be paid off soon. I was crushed. Fast forward (I don’t stay down long..) to today – and another gentleman I spoke to, said that he could qualify us for a loan after I resolve 2 items on our report (no biggie) and said to me it is totally normal now for people to have in excess of $200k in student loan debt (Oh I guess I’m not a martian from Mars…)
Heres the thing. I don’t know what to do – at all – I’ve never touched these loans. Do I consolidate? Do I need to? Should I just enter into IBR? What’s the difference? Will IBR hurt our chances for a loan? I read somewhere in my start of researching that even under IBR sometimes they still have to use 1% because it isn’t a set payment? I read somewhere else if the payment reports on your credit report, they can use that? Why wouldn’t it report on a credit report? My loans are all serviced through Nelnet. Below is what it shows for mortgage verification. Would that change (the regular monthly payment amount) under IBR?
Thanks for your feedback
Regular monthly payment amount $1,676.20
Past due amount $0.00
Due date 05/28/2018
Capitalized interest $12,602.02
Outstanding principal balance $155,703.60
Accrued interest $21,333.57
Outstanding fees $0.00
Current balance $177,037.17
Coming up with a Plan
There are lots of specific strategy questions in this forum post, but it comes down to two primary goals:
- Using Public Service Loan Forgiveness to pay off the loans, and
- Being able to qualify for a mortgage while still dealing with the loans.
Finally, we have the question of how chasing one goal will impact the pursuit of the other.
Getting Started on Public Service Loan Forgiveness
Qualifying for Public Service Loan Forgiveness (PSLF) requires 120 certified public service payments. For a payment to be certified towards forgiveness, it must meet three basic requirements:
- an eligible employer,
- an eligible loan, and
- an eligible repayment plan.
[Further Reading: The Basics and the Fine Print of Public Service Loan Forgiveness]
When one first starts working towards PSLF, it is critical to make sure that all federal loans are eligible. Certain loans are not eligible, such as FFEL loans, but they can be made eligible through federal direct consolidation. The Department of Education’s Consolidation page has excellent information about the pros and cons of federal direct forgiveness as well as the process for getting signed up. Even though the consolidation process may appear confusing at first, most borrowers can navigate any consolidation issue on their own.
In vickim34432’s case, the best way to check is to look up all student loan information on the federal student loan database. This site is also run by the Department of Education, and it is handy for tracking down student loan servicers as well as determining student loan types. Another way to verify whether or not loans need consolidated for PSLF eligibility is to call your loan servicer and ask. Loan servicers have been known to maker errors, so double-checking is critical.
Once the consolidation issue has been addressed, the next step is signing up for a repayment plan. Generally speaking, IBR (Income-Based Repayment), PAYE (Pay As You Earn), and REPAYE (Revised Pay As You Earn) are the best options for those pursuing public service loan forgiveness. Picking the best repayment plan will depend upon marital status, debt level, income, and when the loans were first borrowed.
[Further Reading: IBR, REPAYE, and PAYE: Picking the Best Income-Driven Repayment Plan]
Once the first payment has been made, it is critical to send in an employer certification form. This form is not technically required, but submitting it is the best way to verify that 1) you have eligible loans, 2) you have an eligible employer, and 3) you are on an eligible repayment plan. Once the first certification form is approved the best practice is to do it yearly so that the records stay up to date and the final certification of 120 payments is a breeze.
Getting a Mortgage While Pursuing PSLF
Believe it or not, getting a mortgage while chasing after loan forgiveness is possible. Until recently, mortgage underwriting guidelines from Freddie Mac and Fannie Mac didn’t allow income-driven repayment plans such as IBR to be used for Debt-To-Income ratio calculations. It was a stupid rule, and fortunately, logic has prevailed.
Many mortgage lenders will still see six figures of student debt and run for the hills, but others will realize that the total debt balance will not impact one’s ability to make payments, especially with income-driven repayment plans.
One way to make sure the mortgage process goes through successfully is to get pre-approval from 2 different lenders. Go through the underwriting process with both of them, and if one hits a snag, you will have a backup in place. The underwriting process is a pain, so doubling the work isn’t fun, but it is a good insurance policy.
Qualifying for a mortgage is more difficult for student loan borrowers, but it can be done. The most important thing is that student loan borrowers understand how student debt can impact home loans and strategy.
Putting It All Together
The federal student loan consolidation process can take a few months if it is needed, and enrollment in an income-driven repayment plan can also take a couple of months.
Mortgage applications really can’t start until that income-driven repayment plan number is reported to the credit agencies. Technically, it can start the second that the IBR enrollment is finalized and you can get a mortgage verification letter, but with so much of the mortgage process being computer automated based upon credit reports, it is usually better to just wait until the credit agencies have the new lower payment in place.
If there is an urgency to buy a house, you could technically just get enrolled in IBR and skip the consolidation step, but that would set back the student loan forgiveness clock, which could be very expensive in the long run.
Getting everything in order could take many months, but the good news is that it is definitely possible to pursue Public Service Loan Forgiveness and become a homeowner.
11 thoughts on “IBR, PSLF, and Mortgages… Oh My! How to buy a house and chase forgiveness.”
Thank you for the GREAT information! I’m in a similar situation. I’ve consolidated my loans, I’m on a PSLF and ICR payment plan that will allow my loans to be forgiven in 10 years. So, now that I know my loans will be fully amortized at the end of the 10 year term, my thing is getting a maximum payment I would ultimately be paying and hoping my mortgage company will use this number instead of the 1%. I did speak to my loan office and they can use a number that will fully amortized the loan. Right now, because I never mentioned being on a PSLF, they are using the number given from a Extended Standard Fixed payment plan, which is lower than the 1%, but still pretty high. I’m trying to get around this because I know, I would never pay that amount. When applying for the ICR plan (this is the only plan I can use for PSLF), it gave me a range of payments according to my income now and any increases I may receive in the future. Would anyone know could the highest payment within that range be used for my DTI? This payment would fully amortize the loan in 10 years.
I’ve been in a similar situation. Fortunately, most lenders are better about using options other than the 1% rule, because it doesn’t reflect the actual monthly cost of the student loans.
Is there a reason you don’t want them to use your current ICR payments? With most lenders, this shouldn’t be an issue… unless your monthly payment is $0 per month on your credit report. This article digs into the mortgage-related topics in a little more detail.
Best of luck to you!
Thank you for your response! I actually do want them to use the ICR payment because it allows the loan to still be fully amortized and the payment is wayyyy cheaper, thus helping with my DTI. I guess it was just me not being fully educated on the subject. I was under the impression regardless if I was on a PSLF or not, they still had to use the 1% for the FHA loan so the Extended Standard Plan gave me a lesser payment than the 1%. After reading your article I learned better. I realized that as long as the payment will allow the loan to fully amortize, they should be able to use that ICR payment amount. I actually emailed my Loan Officer with this information today and will be cancelling that Extended Standard Fixed payment plan first thing Monday morning with my Loan Servicer. Thank you for the information!!
I am in a similar situation to the person above but I have consolidated
already, work for an approved agency and have 60 payments credited
already- I am on RE-PAYE. I have 200k in debt and make just under 80k a year. I am in my
lease for the next year so I am hoping to have the money saved by the
end of May/June 2019 to have at least 3% down payment for a home. How do
I find a mortgage company that can work with me? What I pay in rent is more than most people I know pay for their mortgage and have been doing so for almost a decade. How do I find a mortgage company to work with
me- who understands about Re-PAYE and PSLF and will use the new (2017)
Fannie Mae guidelines?
Most lenders should now be willing to accept REPAYE payments when calculating DTI ratios. You can always call and ask ahead of time to make sure.
Thank you for the reply. I tried Quicken loan they initially said work with this issue all the time I even asked specifically about the new Fannie Mae guidelines but when I asked follow up questions, e.g. how much money I will need in reserves, the Quicken agent said that they would need to use 1% of the entire loan not the REPAYE payments.
Perhaps I did not say the correct things to the agent at Quicken loans.
When I called them I asked the agent if they work with student loan borrows, I then talked about my debt and my salary. I then asked if they will use my income based repayment plan (REPAYE) or if they would use 1% of my of my overall debt. Shen than said i have a credit score of 728 & I would qualify for $350,000 for a mortgage (which seemed way too high) after asking where I wanted to purchase (chester county PA). At that time she recommended I pay off my credit card debt. I then called her two weeks later to ask about reserve money and length of time for mortgage and she told me that I could only quality for a mortgage of about $100,000 but only if my credit card debt goes to 0. She then suggested i wait the next 4.5 years when my PSLF kicks in.
I then called someone from the Atlantic Bay Mortgage Group and said that they would use RE-PAYE- I did talk about my salary and my loan debt but did not get into specifics. It is hard to know who is correct. I do not want to get my hopes up.
Your saying most lenders will use REPAYE gives me more confidence that the gentleman from Atlantic Bay Mortgage Group is more accurate. I have just never heard of them and Quicken Loans are widely known.
Any recommendations you have would be greatly appreciated.
I think you are doing the right things. Shopping around and speaking to multiple lenders is definitely the right move.
Were you able to resolve the issue? If yes – how?
I’m in an almost identical situation and hoping you found a way forward.
Thank you for this blog!!!! You are perfectly on time, as I have encountered the same situation. It’s saddening and frustrating to learn that after trying to better your life, you won’t qualify for the major life purchase of house because of the 1% rule. If Sallie Mae made repayment plans then why should it affect the mortgage when PSLF affords and opportunity to relieve the student loan burden and work in an organization that gives back to the community? This by far is the most illogical policy (well top 5) that has no true grounding on one’s ability to afford a mortgage, there is no payment shock when I am on the repayment plan that fits my earnings and service. Are there more people out here that truly see what is happening to those who want better for themselves? Now I have a starting point as to how to proceed.
This is an amazing post and is extremely helpful. Thank you for taking the time to explain it. I will share the article with some friends in similar situations.
Glad to hear it. Thanks Vicki!!