Freddie Getting a Little Picky on Student Loan Debt

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In a mortgage world of eased credit standards, Freddie Mac is tweaking how they will treat an applicant’s student loan debt.

Today when an applicant carries student loans that do not indicate a specific monthly payment amount on their credit report, lenders must obtain documentation to evidence the monthly payment due. This can cause problems and delays.

Student loans with payments based on the consumer’s monthly income traditionally will not reflect the monthly payment on the credit report. These have payments that may adjust each year based on the income earned by the consumer.

Accordingly, effective January 18^th, lenders no longer will be required to obtain documentation to support a monthly payment when no amount appears on the credit report. Instead, for loans tied to income, they must calculate the monthly payment as 0.5% of the original or outstanding loan balance, whichever is greater.

In conjunction with this change, Freddie is also changing their requirement for the monthly payment on deferred loans or those under forbearance where a payment is not reported.

In such cases, the monthly debt will be calculated at 1% of the original or outstanding balance, whichever is greater.

The new requirements continue the use of any monthly payments reported on the credit report while simplifying the process of determining the debt when a payment is not reported.

Under this new scenario, Freddie runs the risk of a borrower’s student loan payment increasing after closing. However, such an increase should be tied to a corresponding increase in income.

Freddie believes that this increase in income will offset any increase in the student loan payment. Seems logical.

With more new homebuyers carrying student loan debt, this change may increase their potential of qualifying for a home loan. That is good news for consumers, Realtors, Builders, lenders, and the economy.

Lenders still need to be careful in determining the type of student debt, documenting the required repayment method, and the consumers overall credit history.

About the Author

Michael Vitali

Michael L. Vitali – Independent Consultant to the Mortgage Industry Mike Vitali is an independent consultant to the mortgage industry on matters concerning compliance and mortgage lending. He most recently served as the Senior Vice President and Chief Compliance Officer for LoanLogics, monitoring regulatory developments and their practical implications for the mortgage lending industry. His duties included research, interpretation, and analysis of existing and proposed legislation related to the industry in support of recommendations for policy and/or procedure changes to maintain continued quality and compliance with all applicable laws, rules and regulations, investor requirements, and standard mortgage practices. In his more than 40 years in the mortgage industry, in senior level management, he has gained experience in all areas of mortgage lending, risk management, and compliance. Mike is a past President of the MBA of Greater Philadelphia, is a charter member and was the second Chairman of the MBA of Pennsylvania, and a past board member and Legislative Chair of both associations. He is a recipient of the 1998 Mortgage Banker of the Year Award from the MBA of Greater Philadelphia, and the 2003 Chairman's Award from the MBA of PA, and currently serves on several compliance related task forces for MBA.