New Policies Help Home Buyers with Student Loan Debt
The soaring costs of getting an undergraduate or graduate degree has driven thousands of college graduates into debt for years after they cross the stage. Ironically, those who worked hard for their degrees and are on their way to well-paying careers can’t get approved for a mortgage: they are too deeply in debt, and the problem is worsening. Graduates in 2015 with student loans left school with about $34,000 of debt, up from $20,000 ten years ago.
A recent study by the National Association of Realtors and American Student Assistance found that 83 percent of prospective buyers cite student loan debt as the most important factor delaying them from buying a home. The average student loan debtor must wait seven years before they can reduce their debt enough to qualify for a mortgage.
Most graduates with student debt have undergraduate or graduate-level degrees and are more likely to have better, more remunerative jobs than those without higher education. Lenders and government agencies are putting in place new policies to make it easier for qualified buyers with student loan debt to get a mortgage.
Higher debt-to-income ratios
One essential statistics lenders use to evaluate a mortgage application is the ratio of a borrower’s monthly debt payments, including credit cards, car payments and personal loans to their gross monthly income. Until recently, the maximum debt-to-income (DTI) ratio that most lenders will approve is 43 percent for an FHA or conventional mortgage. Fannie Mae and Freddie Mac have loosened their DTI standards to top 50 percent. In 2017, Fannie Mae began accepting mortgages for a buyer with student loan debt under certain conditions.
If you’re among the more than five million borrowers who participate in federally reduced-payment plans on your student loan, your actual monthly payments, as reported to the credit bureaus, will count toward your DTI ratio calculations. Previously, lenders were required to factor in one percent of your student loan balance as your monthly payment on the student loan, even though you were paying only a fraction of that.
Also, if you are getting help from someone else to pay monthly debts, such as monthly car payments, Fannie Mae will no longer include these debts in your DTI computation.
Borrowers using Federal Housing Association (FHA) financing will find they can get a loan with a higher DTI than a conventional loan. FHA can accept a DTI as high as 55 percent if their credit ratings are good.
Deferred student loan payments for FHA borrowers
You can defer payments on your student loan debt for up to three years. In the fall of 2015, the Department of Housing and Urban Development (HUD) decided that if a would-be homebuyer’s student loans were in deferment, FHA lenders would still have calculated DTI as if they were making monthly payments on that debt equaling up to two percent of the outstanding balance. A new HUD rule allows FHA lenders to assume that you’re paying only one percent of the balance of your student loans each month to calculate your DTI even if you were paying nothing.
Fannie Mae’s new homes pilot project
Fannie Mae has enlisted 10 home builders to participate in a test-and-learn pilot project that requires builders to provide financial assistance that borrowers must use to pay off a portion of the student loan debt for buyers of their homes.
The idea for the project originated from a new program from Eagle Home Mortgage, the lending arm of national homebuilder, Lennar. Eagle Home Mortgage wanted to find out whether raising the limitation on financial assistance from third parties will help buyers burdened with student debt become homeowners. Under Eagle Home Mortgage’s Student Loan Debt Mortgage Program, at closing, Lennar contributes up to three percent of the purchase price to pay down student loans. It is not intended for parents who may have taken loans to finance a child’s education. Buyers may be eligible for other incentives offered by Eagle Home Mortgage, such as credits toward closing costs.
Under certain conditions, these changes will help many student loan debtors qualify for mortgages, but student loan debt will continue to be a significant barrier for graduates who want to buy a home.