Deferred liabilities are debts you have but do not actively pay. For example, student loans are often deferred. Borrowers do not have to start making payments until the grace period ends. This does not mean they do not owe the debt, though. Because of this, each mortgage program has its own requirements. We discuss them below.
Conventional Loans and Deferred Debts
Fannie Mae has guidelines in place for deferred student debts. The easiest scenario is when the debt reports on your credit report. Fannie Mae allows lenders to use the payment the credit report shows. If the amount is incorrect, you can supply the lender with your most recent statement showing the right payment. The lender can then use that amount.
If, however, the credit report does not show a payment, the lender must do one of the following:
- Use 1% of the loan amount as payment if the loan is in deferred status
- Use the full payment as documented on the loan papers
- Use $0 if you can prove that you are on an income driven plan that doesn’t require a payment
If you have any other type of deferred debt, you must provide the lender with proper paperwork. The paperwork must show the future payment. If it does not, the lender will likely use one of the above methods.
FHA Loans and Deferred Liabilities
The FHA has similar guidelines as Fannie Mae for deferred debts. They used to allow you to ignore the debt if it was deferred for at least 12 more months. Today, though, you must include the debt in your debt ratio. If your payment reports on the credit report, the lender can use that value. There are exceptions:
- Your payment may be less than what the credit report shows
- Your payment may be less than 1% of the outstanding balance
If either are the case here, you must provide ample evidence of the payment from the student loan provider.
In any case, the lender will use the greater of either:
- 1% of the outstanding balance
- The amount the credit report shows
VA Loans and Deferred Debt
The VA loan is among the minority here. The VA still allows borrowers to exclude student loan payments with deferment greater than 12 months. Keep in mind, though, the VA does not put a lot of emphasis on the debt ratio. Instead, they focus on your disposable income. It is still helpful to exclude these debts if possible, though.
If your loan payments begin within the next 12 months, the lender must determine your threshold payment. The calculation is as follows:
Loan balance x .05 = Annual Payment/12 = Monthly Payment
Here is an example:
You owe $30,000 on your student loans.
$30,000 x .05 = $1,500/12 = $125 per month
If, however, the payment on your credit report exceeds $125, the lender must use that value. If the payment on the credit report is lower than $125, you must provide evidence from the loan servicer. The documents must be dated within the last 60 days in order for the lender to accept the lower payment.
USDA Loans and Deferred Debt
USDA loans are one of the simplest to understand regarding deferred debt. They do not have options. If you are actively paying on your loan, they use the actual payment. If your loan is in deferment, they use 1% of the outstanding balance. They obtain the outstanding balance from your credit report. They do not require any documentation from your loan servicer. They also do not have any exceptions.
Keep in mind, lenders can add their own requirements. They fund the loans in all of the above situations. As long as they abide by the minimum guidelines of the loan program, they can make stricter requirements. For example, some lenders may not allow use of a lower payment despite receiving documentation from the loan servicer. They may require that you use the payment reporting on your credit report or 1% of the balance. If this is the case, you may have to shop around to find a lender without overlays.
The Benefit of Including Student Loan Payments
It might seem unrealistic to include deferred loan payments in your debt ratio, but it makes sense. Let’s say your debt is deferred for 24 months. After that 24 months, you owe $500 on your student loans. That is $500 you did not have to pay before. Suddenly, your monthly bills might be harder to afford. You can’t predict the future, so you do not know what will happen to your income. What if you can’t afford your mortgage? You could start defaulting on certain debts and digging a hole for yourself. When you include the debts, you safeguard yourself against these issues.
The good news is the lender does not make you take the loan out of deferment. All it does is help protect you against taking a larger loan payment than you can afford. Taking into account all debts you will have to pay in the near future helps. It might seem hard at the time because you can’t buy the house you want, but you will be grateful in the future.
As always, talk with different lenders. See what their take is on your deferred debt. Just remember, you will have to pay the debt at some point. Even if you get on an income-driven plan or have the debt forgiven, there are always payments due at some point. Think of the deferred liabilities rules as protection against future financial problems.