getting a mortgage on IBR

IBR, PSLF, and Mortgages… Oh My! How to buy a house and chase forgiveness.

Michael Lux Blog, Strategy 8 Comments

Editors Note: This article was originally published on January 21st, 2018. It has been modified to include updated links to various federal student loan resources.

In this edition of the student loan plan, we take a deep dive into one reader’s student loan situation. User Vickim34432 came by the student loan help center to ask about the best strategy for qualifying in order 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 us.

Vickim34432 writes:

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

Account Summary
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. In order for a payment to be certified towards forgiveness, it must meet three basic requirements: 1) an eligible employer, 2) an eligible loan and 3) an eligible repayment plan.

[Further Reading: The Basics and the Fine Print of Public Service Loan Forgiveness]

When one first gets started 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 great 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 it 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 very useful 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 we recommend doing it on a yearly basis 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. In the recent past, 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-approvals 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.