Written By: NAMP® Op-Ed Ghost Writer
2016 has seen numerous changes in guidelines for reviewing student loan qualifying payments. In this two part series, N.A.M.P. and N.A.M.U. will provide tools for processors and underwriters to use when determining which calculation should be used for qualifying student loan payments. We will begin with Fannie Mae and Freddie Mac’s rules on this topic. Part II will explore USDA, FHA, and VA rules.
Fannie Mae guideline B3-6-05: Monthly Debt Obligations (Student Loans) provides the following guidance for student loan evaluation. First, all student loans, regardless of repayment status must be included in the qualifying debt ratios. There is no circumstance under Fannie Mae’s guidelines where student loan payments may be excluded.
Fannie Mae allows lenders to apply a blanket rule of using 1% of the outstanding loan balance to qualify. If using this calculation, no further documentation regarding the repayment terms of the student loan is required. If the lender wishes to use any payment other than this 1%, additional conditions apply.
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The lender may obtain proof of the fully amortizing payment directly from the student loan servicer. The lender also has the option to develop a monthly payment that will fully amortize based on current student loan interest rates and allowable repayment periods. Fannie Mae’s guidelines include a table that assists in the development of this payment. The guideline also provides a link to the U.S. Department of Education’s website where lenders may obtain the current student loan interest rates. If the lender is using the payment reflected on the credit report to qualify, the lender must retain proof in the loan file that this payment is fully amortizing.
Per Freddie Mac’s guideline 5401.2 Monthly Debt Payment-To-Income Ratio (Payments on all installment debts), installment loans with more than 10 months of remaining payments must be included in the qualifying ratios. As with Fannie Mae, there is no scenario where student loan payments may be omitted from the debt ratio. If the student loan is listed as deferred or in forbearance, the lender must obtain documentation from the student loan servicer verifying the monthly payment amount included in the DTI.
Lenders may also obtain a copy of the borrower’s original loan agreement, or a letter from the student loan servicer that discloses what the payment will be once the student loan reaches full repayment status. If no documentation is provided, the lender must use 1% of the outstanding balance of the loan for the monthly qualifying payment.
As a result of these rules, it may be processing and underwriting best practice to begin initial file reviews with 1% of the balance as the qualifying student loan payment. If using this payment, the loan is qualifying at the most conservative debt ratio. This method will also eliminate the requirement to obtain any further documentation on the matter and leaves no room for interpretation of any student loan documents.
However, if any other payment is used to qualify, it will be up to the underwriter to document an air-tight case for the payment used. Any ambiguous information can expose the lender for loan repurchase from agencies and lenders. It can also cause insurability issues with private mortgage insurance companies as MI rates are typically based on DTI and other loan factors.
About The Author
All of NAMP® staff writers are veteran mortgage processing & underwriting instructors for Mortgage Underwriter University (www.MortgageUnderwriter.org). They have each conducted numerous mortgage processing & underwriting training classes and have worked in the mortgage banking industry for 25+ years. If you're interested in becoming a writer for NAMP®, please email us at: firstname.lastname@example.org