Bri Lacy, an attorney in Florida, was ready to purchase a home. She contacted her lender to get pre-approved for a mortgage. But there was a problem — her federal student loans were in an automatic forbearance due to the CARES Act, and having no student loan payments due was unacceptable to her mortgage lender.
Lacy explained, “I don’t have a billed amount. Even though I have documentation that says what my monthly student loan payment is under an income-driven repayment plan if I was not in forbearance, the underwriter of the mortgage loan uses a 1% [of the student loan balance] figure to determine my monthly student loan payment.” As a result, the mortgage lender concluded that Lacy’s student loan payment is hundreds of dollars higher than what it actually would be if she was not in the CARES Act forbearance.
“I’m quite bummed,” she said. She said that she can either choose to pay much higher payments than she needs to right now under the terms of the CARES Act, just to be qualified for a mortgage, or she may have to wait and potentially miss out on some of the lowest mortgage interest rates she has seen in years.
CARES Act Forbearance And Mortgages
What exactly is going on here? Rory Gill, a real estate attorney in Boston, explained.
“The CARES Act administrative forbearance can be both a blessing and a curse,” Gill said. “For those who need the reprieve, it can be an opportunity to save, or a short-term financial savior. For homebuyers, though, it can have disastrous consequences for mortgage loan eligibility.”
Student Loans And Your Credit Score: Qualifications And Impact
Gill explained, “Most lenders will use the actual monthly student loan obligation in [mortgage] underwriting calculations — unless that number is zero. When it’s zero, lending standards assume a monthly payment of 1% of the loan balance. For those carrying high student loan balances, this throws off the math pretty substantially.”
Gill noted that a homebuyer with an income of $70,000 and no debt should be able to qualify for monthly housing expenses of about $1,633. That’s up to a $350,000 mortgage loan. If she had $150,000 of student loan debt and was using a REPAYE payment plan, her student loan payment would be around $430 per month. That’s not enough to impact her maximum mortgage loan amount — assuming she has no other debts.
Gill explained, however, that this same situation is thrown out of balance during the CARES Act forbearance period. Even though her monthly student loan obligation is less (zero, in fact) during the CARES Act forbearance, mortgage lenders will treat her as a greater risk. Using the 1% rule, mortgage underwriters will assume that her monthly student loan payment is $1,500. As a result, she may now only qualify for a maximum monthly housing payment of $600. At most, that’s a mortgage loan of $120,000.
What Can Student Loan Borrowers Do To Get Mortgage Approval?
For many student loan borrowers, options are fairly limited in these circumstances. Borrowers may be faced with a difficult choice to either opt out of the CARES Act forbearance solely to get mortgage approval, or waiting until the forbearance ends (at which point interest rates could be higher).
Lacy tried a different approach, and opted to work directly with her mortgage lender to push them to make an exception for her case. Her initial experience with the lender was “terrible,” as she had to work with multiple agents and supervisors, some of whom did not seem to understand the nature of her difficulties.
Lacy wound up sending her mortgage lender a copy of her last student loan bill prior to the forbearance, a statement showing her progress towards loan forgiveness, and a letter from her student loan servicer explaining how the CARES Act forbearance works. She also sent over her most recent student loan monthly payment schedule that confirms her monthly billed payments though 2021, after the CARES Act forbearance ends.
Finally, Lacy received good news — she was pre-approved for the mortgage. However, her lender explained that once she moves forward with a home purchase, her lender will have to submit all of her paperwork to the underwriter, who will then make a final determination.
“I feel confident that with both my loan payment schedule and my latest proof of anticipated loan forgiveness, it will be fine,” Lacy said. But this entire process, she noted, has been exhausting.