The federal Coronavirus Aid, Relief, and Economic Security (CARES) Act puts an automatic suspension on payments for eligible federal student loans for six months, from March 13, 2020, until September 30, 2020. For many people, getting a break from payments during this national emergency is a lifesaver. But for others, having a loan in forbearance can hurt or ruin their chances of qualifying for a new mortgage or refinance loan.
Here’s why: Mortgage lenders usually use your actual monthly student loan payment amount in their underwriting process, unless that number happens to be zero. In that case, lenders typically use 1% of the loan balance in their calculations when figuring your monthly debt obligations. If you have a loan with relatively low monthly payments—say under an income-driven repayment plan—that’s in forbearance, but have a high outstanding balance, the lender will use the 1% rule. Under this rule, the calculated amount the lender assumes you’re paying each month on your student debt could be hundreds of dollars higher than what it would be if you weren’t in a CARES Act forbearance.
So, to qualify for a mortgage or refinance, you might have to opt out of the CARES Act suspension and start making student loan payments again. Or you can wait until the CARES Act suspension ends to apply for the loan. But you might have to pay a higher interest rate at that time. Another approach is to ask the lender to make an exception. To try to convince the lender to give you the mortgage or refinance loan, you can send them:
- a copy of the last student loan statement you received from your servicer before the forbearance showing the lower payment amount, and
- a payment schedule confirming the amount you’ll have to pay each month after your CARES Act forbearance ends.
If the lender still won’t approve your application, you might consider trying to find a different mortgage company that’s willing to work with your situation.