If you are considering buying a home and have student loans, there are some solutions that can make that journey easier. I have a guide to Student Loans and Buying a Home, so comment below, and I will send it to you. Let’s chat if you have any questions about financing a home with student loan debt! Solutions may be more achievable than you think!
Related Article Title: Freddie Mac – Bulletin 2023-18 – Dated 9-6-2023 – Student Loans & Refinances
Written by: Sue Villanova, Staff Writer
Freddie Mac published Bulletin 2023-18 with new guidance on student loan debt and refinances. This is very timely, considering the student loans that were in forbearance are due in October!
Interpretive Comments
Student Loan Debt Calculation- Effective Immediately. GREAT change!
Right now, if the credit report for a student loan shows a $0 payment, you must use .5% of the balance in qualifying, but NOW, if the credit report says $0, you can get other proof of what the payment is instead! This is how the guide changed in 5401.2:
- If the monthly payment amount reported on the credit report is zero, the Seller must use 0.5% of the outstanding loan balance, as reported on the credit report, unless other documentation in the Mortgage file supports a different current payment amount.
Now, one thing to remember is that they won’t accept a payment of $0, so if the Income Based Repayment plan says $0 due, you must use the .5%. The benefit to using the other documentation is that if the IBR says $15 a month, then you can use that!
Student Loan IBR Plans- Effective for Settlement Dates on or after January 4, 2024:
Student loans with an IBR plan must be re-certified every year to ensure the student loan agency has accurate income figures to determine the monthly payment they expect from the Borrower. Right now, all agencies assume that the Borrower will re-certify and that the payment won’t change, but Freddie Mac is now requiring that there is proof in the file of eligibility. What is unclear is how this is supposed to be documented. If I had to assume, it would be that if there is anything in the IBR terms that shows the payment is going up, the higher payment gets counted. This does not go into effect until settlement dates on or after January 4, 2024, so I am sure Freddie Mac will release more information!
From the same section 5401.2:
The Borrower is eligible or approved, as applicable, for the student loan forgiveness, cancelation, discharge, or employment-contingent repayment program, and the Seller is not aware of any circumstances that will make the Borrower ineligible in the future. As applicable, evidence of eligibility or approval must come from the student loan program or the employer.
The Student Aid website (studentaid.gov) is an excellent place for info on IBR plans and how to manage them.
Refinances
No-Cash Out Refinances:
Freddie Mac is updating their no-cash-out refinance guidelines to state that amounts deferred under a loss mitigation plan or costs associated with either can be paid off with the refinance, and it will not be considered a cash-out refinance. This definitely needed to be clarified since the back payments are being paid off.
Cash-out transactions – 3 changes!
- If the title is in an LLC, the transfer of the title to the Borrower’s name must be completed on or before the note date. It used to be “before” only, which will help complete the transaction faster.
- The 12-month seasoning requirement does not apply to Construction Conversion, Renovation Mortgages, or Manufactured Homes that were just converted to real property under state law.
- For Manufactured Homes, the Borrower must have owned the land and home for 12 months before being able to cash out. However, Freddie Mac has reduced it to 1 Borrower on the title for at least 6 months prior to the note date WHEN the home was free and clear.
There are still some unknowns about navigating the IBR payment plans and what is needed to ensure you can still use the lower payments. Be on the lookout for additional FAQs from Freddie Mac on this topic as we approach October!
Loan Originator/Processor Interpretation
With Student loan payments restarting, this is an excellent opportunity to use the social media post and Mortgage Talking Points we developed for you to make your referral base aware. Use the Lunch & Learn to update your referral sources so they know what has changed! Also, pay attention to the No Cash Out and Cash-Out refinances changes, as these may open up more opportunities for you.
Underwriter Interpretation
With the “unknown” in correct documentation, it will be up to your team to decide on best practices until more clarity is revealed. Also, with the files in the pipeline vs. the effective date, careful attention will need to be placed on your decisions and conditions for clients with student loans.
Manager/Owner Interpretation
Some of these changes are substantial enough to warrant a quick review with your staff. You may also need to review how to approach the “yet to be clarified” issues on student loans to provide your team with some direction.
