The Urban Institute recently published an examination of how federal mortgage programs (Fannie Mae, Freddie Mac, the Federal Housing Administration, the United States Department of Veteran’s Affairs, and the United States Department of Agriculture) account for income-driven repayment (IDR) plans in their underwriting. The authors find that the five federal mortgage programs, which account for two-thirds of mortgage originations in the United States, use different methodologies.
Among the findings:
- Nearly 45 million individuals in the United States have student loan debt, of which 8 million are on an IDR plan.
- Thirty percent of borrowers in repayment are on an IDR plan.
- Mortgage underwriters calculate an applicant’s debt-to-income (DTI) ratio, a measure of an applicant’s total debt payments (e.g. student loans, credit card debt) to income. The DTI ratio, student loan payments, credit scores, and other factors, are then used to determine an applicant’s eligibility for a mortgage.
- When a borrower has fixed monthly payments (such as on the standard repayment plan), underwriters use the actual monthly payment in their DTI calculations.
- Payments on IDR plans are variable, and monthly payments reset following annual income recertification.
- Generally, payments are 10% of monthly discretionary funds. For borrowers with income less than 150% of the federal poverty level, the monthly payment is $0.
- Each of the five federal programs uses a different methodology for factoring in these monthly payments.
- Fannie Mae uses the actual IDR amount, even if it is $0.
- Freddie Mac uses the actual IDR amount, unless it is $0. In the case of it being $0, they use 0.5% of the loan balance as the monthly payment.
- The Federal Housing Administration and the U.S. Department of Agriculture uses 1% of the loan balance as the monthly payment, instead of the actual IDR amount.
- The U.S. Department of Veteran’s Affairs allows lenders to use either the actual IDR amount or 5% of the loan balance as the monthly payment.
- The programs that first-time homebuyers are most likely to use are the most likely to put them at a disadvantage due to their IDR payments.
- 79% of Federal Housing Administration borrowers, 84% of U.S. Department of Agriculture borrowers, and 54% of U.S. Department of Veteran’s Affairs borrowers are first-time homebuyers.
- The variety of methodologies used means that candidates who are unable to repay their loans on a standard repayment plan could be approved or denied for a mortgage based on the methodology used.
