How To Get A Loan With An Income Based Repayment Plan IBR Student Loans

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Published 
February 5, 2020

Getting a loan with IBR

Now, let's about Income-Based Repayment, IBR, and mortgages. So how do you qualify for a mortgage with student loans with student debt and income-based repayment?

What is IBR?

So income-based repayment is basically a tool that you can use if you have federal debt and want to lower your monthly student loan payment.

Why do we need IBR?

You can use income-based repayment to have more manageable monthly payments on your student loans. So you would apply for these programs. Then what would happen is they would use your income as a scale to help determine what you could pay monthly on your student loans. because sometimes the student loans are way too high for the income you might be making and you need something more manageable.

Student loans

Now, if you have IBR, how do you qualify for a mortgage? First, Let's talk about student loans. I'm going to use this quick flow chart to help you understand everything that's going on. So let's dive into this.

First, what we need to see when we're talking about student loans before we look into IBR is we need to look at, is there a minimum payment due? So right now, are your student loans reporting a minimum payment on your credit report? That means is the student loan company, are they asking for a payment every single month? If the answer to that is yes, then we need to follow this path and say the minimum payment must be used.

So that means that the minimum payment has to be used to count towards your debt-to-income ratio on your mortgage. Just how, if you had a $300 a month car payment, if you had a $300 per month student loan payment, that's going to be counted in your debt-to-income ratio on your mortgage. So if you have student loans that are too high that throws your debt-to-income ratio off and can make it difficult to qualify for a mortgage.

So if we don't have a minimum payment due, we can see, do we have IBR? If "yes", then we can only use loans that allow IBR. If we don't have IBR, then we have to follow payment rules.

Who can apply for IBR?

So right now, if you do have student loans or reporting, you can look into and apply for IBR. We're not going to get into instructions on that because I can't give you really helpful advice on that. You're going to have to talk to whoever is servicing your loan.

But if your loan is currently active and they're collecting payments, you can try to apply for IBR and see if that payment could get lowered. If you don't have payments being collected, then you can't apply for IBR right now because your payment is deferred. And there's no point in you trying to set up a payment plan.

But to qualify with a mortgage with IVR, you have to have at least one month that you've paid on an IBR plan.

Rules for different loan types

So let's jump into some of the rules for different loan types. Whether they allow income-based repayment or not, it's a little difficult because not all loans allow income-based repayment and it can be difficult to see which loan is going to be the right one for me, depending on my situation as a student.

Ultimately, what I would default to is you don't have to figure this all out on your own. I would talk with a mortgage broker, and let them know where you're at. Hey, this is what's happening. And then they can help you explore all these different options because all of these different loans have qualifications on top of the student loan qualifications, and it can be difficult. So we're going to dive into it so you can see what's going on, but ultimately, no, you don't have to figure it out. You can get help through this process.

Conventional loan qualifications

So first conventional loans, if you do have an income-based repayment plan, a conventional loan is going to be your number one loan. This is going to be the best loan for you because of the conventional allowance IBR. They will take whatever your income-based repayment plan is that monthly payment and use it as in your debt to income ratio. So if initially, your student loans are, were $500 per month, but on IBR, they're now $300 per month.

You now get to use $300 per month on your debt-to-income ratio. That means you can qualify for more houses because your student loans are lower.

1%-0.5% of loan balance

If there is no payment reporting on your credit report, or if you're not using income-based. Then the lender has to use the minimum monthly payment on your credit report to qualify for your student loan. If nothing's being reported, then they either have to use a 1% or point 0.5% of the loan balance.

So for instance, if you had, let's say a $10,000 student loan, we would multiply that by a 0.01. And we would see that we would have to use a hundred dollars per month and. You were a student loan payment per month to count towards your debt-to-income ratio. So conventional loans are going to be your best bet. If you have IBR right now, try to get a conventional loan.

Does FHA allow IBR?

Now let's hop over to FHA loans. FHA does not allow income-based repayment. This is really frustrating because FHA loans are really great for people who have maybe not as much credit history, or a lower credit score.

Maybe they need a low down payment or they need a higher debt-to-income ratio. FHA loans are great for that, but they don't allow income-based repayment plans. So if you're on an income-based repayment plan, FHA is going to look at what's reported on your credit report.  What's the minimum monthly payment there.

So if you are paying $300 a month on IVR, but your actual normal minimum payment is 500. They have to use 500 or they have to default to 1% again of the balance per month. Okay. So something to keep in mind there.

VA loan for IBR

VA or Veterans Affairs loan allows income-based repayment. The problem with VA is you have to be a veteran, so that disqualifies a lot of people. So if you are a veteran, IBR might be a great option for you.

VA has one little caveat that says yes, as long as you're going to keep that payment for greater than 12 months. So something to keep in mind there and that you're not going to have an active. At a full payment in 12 months or less.

If you don't qualify it with that, if you don't have IBR, then VA's rules are to take 5% of the loan balance divided by 12. So in this instance, if we took $10,000 5% of that would be your $500. And then we divide 500 by 12, which gives us 41.66 per month. So you can see VA's loan calculations are a little bit more forgiving than conventional FHA or USDA.

IBR for USDA

Then USDA as well. No IBR allowed. If you have an income-based repayment, you can't use it on a USDA loan. They're going to have to use 1% of the balance or the minimum score or the minimum payment reporting on your credit report.

So what's the best loan program for IBR

So ultimately the two best loans that you have, are if you are on an income-based repayment or conventional or VA. If you're not a veteran, your only option is conventional. If you are a veteran, VA is your best option.

Deferred loans, we can use payment rules

Something to note is that if your loans are currently deferred, this is where we have to use payment rules. Payment rules are simply just these bottom portions here that are telling us what percent has to be used. So what often happens is maybe you're looking at purchasing a home, but your student loans aren't active yet. They are being deferred. Meaning that payment isn't due until a future date. If that's happening, then a lender has to use these payment rules.

So they would, in this instance for a conventional loan use 1% for an FHA loan. Use 1% for VA loan, 5% divided by 12 USDA loan. 1% they have to use these payment rules. If there's no payment reporting on your credit score.

Payment history when your debt is paid by others

Also, if your debt is paid by others and you can show proof for 12 months or more. Then you can remove or exclude that student loan payment from your debt to income ratio. So let's say a parent has been paying student loans on your behalf. If you can show the history of that for 12 months, plus on-time payments of those student loans, you can remove them from your debt-to-income ratio.

That's going to be a really great option if you're fortunate in that circumstance where someone else is paying student loans for you, but hopefully, this gives you a good idea of IBR. And if you can qualify for a mortgage with student loans, you absolutely can. Were these student loans not as big of a deal as they can seem to be.

It can seem like there's no way I can qualify to purchase a home with student loans, but you absolutely can people all the time have monthly debt. They have credit cards, they have student loans, they have cars, and they have other installment loans.

Talk to your loan officer

So having a student loan is just an addition to a monthly payment there. The whole point of being on IBR and trying to figure this out is trying to lower that debt-to-income if you're having trouble qualifying to begin with. So what I would suggest is the first talk with a mortgage broker and see, do you even need to explore these types of programs? Because for most people it's a non-issue, it's something that really doesn't impact. If it does impact you, then you can talk through some options that might work for you.

Talk with a loan officer
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