How Does Freddie Mac Calculate Student Loans

Last Updated on August 25, 2023

How Does Freddie Mac Calculate Student Loans?

Freddie Mac is a government-sponsored enterprise that purchases mortgages. It is one of two government-sponsored enterprises that buy mortgage loans from lenders and make them available as securities to investors. The other GSE is Fannie Mae.

When you apply for a mortgage loan, the lender will check your credit history to determine whether you qualify. The lender also checks your income and assets to assess how much money they can lend you. When they make an offer on your house, they include the amount of the loan in their offer letter.

To ensure that lenders aren’t giving out too many loans and putting themselves at risk of defaulting on those loans, Freddie Mac makes sure that lenders have enough cash reserves in case there are any problems with homeowners’ payments (i.e., if they lose their jobs, get sick or injured).

Freddie Mac uses a formula called the Uniform Mortgage Credit Risk Assessment System (UMCRAS) to calculate how much money a lender should have in reserve based on the risk level associated with each type of loan product offered by that lender. The UMCRAS formula calculates risk factors such as delinquency rates for certain types of loans as well as expected losses for each type of loan product offered by

How to Qualify for a Freddie Mac Mortgage with Student Loans - Find My Way  Home

How Does Freddie Mac Calculate Student Loans

Freddie Mac is a very important institution in the mortgage world because they purchase mortgages from banks, enabling that bank to then give mortgage loans to more people as a result. (Don’t worry, this process happens behind the scenes, and most of the time it will be invisible to you, because you’ll still keep paying your mortgage to the same bank.)

Freddie Mac Student Loan Guidelines 2022
Freddie Mac, like other mortgage purchasers, has specific requirements for the loans they will purchase, including guidance on how student loans should be considered in the mortgage approval process.

Since your banker will probably sell your loan to Freddie Mac or another mortgage purchaser your mortgage lender will probably use the guidelines created by Freddie Mac (or another loan purchaser) as the criteria they will use to approve your loan.

Therefore, if you have student loans, Freddie Mac’s student loan guidelines will be an important part of your loan company’s decision to grant your mortgage loan application.

Freddy Mac’s student loan guidelines tell your mortgage lender how they should include your student loan repayments in the debt-to-income ratio [LINK to an article explaining debt-to-loan ratio] (also known as DTI) portion of your financial analysis because your debt-to-income ratio is a key number used to determine your mortgage loan eligibility.

Here is a summary of Freddie Mac’s Student Loan Guidelines:

If your student loan is in the process of being repaid, if payment is deferred (meaning you aren’t required to make payments at this time,) or in forbearance (when you don’t have to pay the principal on your loan or are allowed to make a lower monthly payment for 12 months) the payment they should use in the debt-to-income calculation should be:
The amount reported by your student loan lender on your credit report as the required monthly payment, or
If the required monthly payment on your credit report is zero, they should use 0.5% of the outstanding loan balance reported on your credit report as the required monthly payment. So, if you owe $100,000, and the required monthly payment is listed on your credit report as $0, Freddie Mac’s student loan guidelines dictate that they would use $500 as your required monthly payment.
If your student loan has been forgiven, canceled, or is in discharge (you no longer have an obligation to repay your student loan) or is part of an employment-contingent repayment program (where your payment amount is based on your income level and family size) your student loan payment can be excluded from the debt-to-income ratio calculation. That can only happen if you can provide adequate proof to your mortgage lender that:
Your loan has less than 10 monthly payments before it will be totally forgiven, discharged, canceled, or if you are in an employment-contingent repayment program it will be considered repaid within 10 monthly payments.
Your monthly student loan payment is deferred or it is in forbearance and at the end of that deferment/forbearance period, the full balance of your student loan will be zero because it will be forgiven, canceled, discharged, or if you are in an employment-contingent repayment program it will be considered repaid at that time.
AND

You can provide convincing proof to your lender from the student loan provider or your employer that you are eligible for forgiveness, cancelation, discharge or are part of an employment-contingent repayment program.

Freddie Mac has special rules for your student loan debt that’s going to be forgiven under the Public Service Loan Forgiveness program.

For those of you that are less than a year away from getting your loans forgiven, Freddie Mac will exclude your loan payments from your DTI if you:

have 10 or less monthly payments remaining until your loans are forgiven and
meet the requirements for forgiveness under the PSLF program.
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Freddie Mac Debt to Income Ratio Guidelines
In general, Freddie Mac looks for your debt-to-income ratio to be not more than 33% to 36% of your stable monthly income.

Stable monthly income is your verified gross monthly income from all acceptable and verifiable sources that can reasonably be expected to continue for at least the next 3 years.

In some circumstances, your DTI can be up to 45%. (And even 50% in limited situations.)

In those cases, a justification for the higher qualifying ratio must be provided.

Final Thoughts
Buying a home when you have a lot of student debt seems impossible. But it’s not. You just need to understand how the underwriting guidelines work for the financing option you’re choosing.

freddie mac student loan percentage

Many times, buyers with student loan debt hear the following mortgage lender response: “Sorry, but when using 1% of your outstanding student loan debt as a payment, your debt to income ratio is too high for a mortgage loan”. Regretfully, even though a buyer may have a low income based repayment student loan payment, FHA requires lenders use 1% of the balance or the fully amortized payment for mortgage qualification. This can be a significant hurdle in qualifying for buying a home. With the new Freddie Mac student loan guidelines, buyers have some great home purchasing loan options!

Student Loan Debt Issues
Early 2018, the U.S. crossed a student loan debt milestone in the worst way. The Federal Reserve reported $1.5 Trillion in student loan debt! That number is just too hard to imagine. But, owing $50,000 or $100,000, maybe more in student loan debt is more of a reality these days. These borrowers fully comprehend these numbers and when it comes to buying a house.

If you figure a 1% payment based on $100,000 in student loan debt, that is a $1,000 qualifying payment. By the way, that is the student loan qualifying payment. We still have to include the new house payment and other debts! It takes a healthy income to qualify in cases like these, which hurts buyer chances. This is especially true for first time home buyers who are typically at the low-income point of their career.

Income Based Repayment Student Loans
Fortunately, for many student loan borrowers, the student loan companies offer very flexible payment options. These include deferment, graduated payment, extended term loans, and income-based repayment (IBR). Mortgage programs treat each scenario a little different from each other. Plus, each mortgage loan program has its own benefits. Income-based repayment student loans often offer a drastically reduced payment based on the borrower’s income level. The required payment may even be as low as $0 per month. Believe it or not, it is not uncommon for someone to owe $50,000 and have an IBR payment of $0 – $50 per month.

So, student loan programs have obviously gotten creative in their payment options. The low payments offer affordability to borrowers who are often starting their new career. Mortgage programs have been slowly becoming more lenient towards income-based repayment student loans.

Luckily, there are some new affordable solutions for these situations that are flexible on debt ratios, but also provide low down payment options. Freddie Mac student loan guidelines now compare more favorably against other lending agencies like FHA or Fannie Mae.

Freddie Mac Student Loan Guidelines
Freddie Mac, short for Federal Home Loan Mortgage Corporation, is a government-sponsored entity which offers a secondary market for lenders to provide affordable home loans to borrowers. At OVM Financial, we take pride in offering Freddie Mac’s great products, but we don’t stop there. We also believe in educating borrowers. Home buyers should understand what they are getting and making an informed decision. Learn more by reading more of our blog articles made for you!

Easier Buyer Qualification
As we discussed many are on income-based repayment programs. Remember, these payment plans are at a much lower payment level. If possible, buyers want to qualify for a house based on these lower numbers because of the lower the debt payments, the lower the qualifying debt to income ratio, the easier to buy a home. In other words, easier buyer qualification.

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