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STUDENT LOAN EXTENDED PLAN VS IBR
Can switching to an extended payment plan with student loans help with DTI vs using the 1% with a graduated payment or IBR plan? Will underwrites allow this change?
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To help your debt-to-income (DTI) ratio, consider switching to an extended payment plan for student loans if lenders calculate them this way while underwriting mortgages.
How Lenders Calculate Student Loan Payments:
FHA Loans:
Standard 1% Calculation: The standard 1.0% calculation has been changed to 0.50% on FHA, USDA, and Conventional loans. If no payment is reported on the credit report, HUD guidelines may require the lender to use 0.50% percent of the outstanding loan balance as a monthly payment when the student loan is on an income-driven repayment (IDR) plan.
Actual Payment Option: A lender can apply this method if it fully amortizes a loan or pays it off within its term. The lender uses the amount paid each month according to what was found on the credit report after the borrower switched to an extended payment plan.
Conventional Loans (Fannie Mae and Freddie Mac):
0.50% or Actual Payment: For Fannie Mae, lenders generally use either 0.50% percent of the outstanding balance or the actual amount paid each month based on what appeared on the credit report. But if no payments were shown, Freddie Mac would default to using 0.5% of the remaining balance owed.
VA Loans:
Payment Calculation: VA guidelines allow using greater than zero actual monthly payments. However, if $0 is the amount due under an IDR plan, five percent should be divided by twelve and multiplied by the loan balance to be taken as payment when necessary.
Impact of Switching to an Extended Payment Plan:
Lower Monthly Payment: If you switch to an extended repayment scheme, your monthly installments will be reduced, which in turn decreases your DTI ratio and makes qualifying for a mortgage easier, especially when your current student loan payment is higher under IBR or graduated plans.
Lender Acceptance: Most mortgage lenders would agree with these changes provided all requirements are met, i.e., documentation must show new payment terms along with consistently fully amortizing payments. However, it is recommended that one ensure their credit report reflects this modification before applying for a loan.
Next Steps:
Discuss with a Lender: Your lender or mortgage broker should be among the first people consulted before making any decisions regarding changing student debt repayment plans since they have vast knowledge about various loans and their implications for the DTI ratio.
Update the Payment Plan: If you decide to pursue the extended payment plan option, ensure all relevant information is updated on your credit report to avoid raising questions during the underwriting process.
Although switching to an extended payment plan might help lower one’s DTI ratio, one must work closely with their lender, who will advise accordingly based on their underwriting guidelines.