If you have hefty student loan debt, you may wonder whether you will ever get it paid off. You might also worry that it will stop you from applying successfully for a competitive mortgage.
Indeed, hundreds of thousands of would-be homebuyers in their 20s and 30s have been putting off purchasing homes over recent years. According to the Federal Reserve, this correlates with student debt.
But what many young homebuyers and would-be homebuyers are not aware of is that rules which went into effect a couple of years ago now make it easier for those with student loan debt to qualify for home loans.
Student Debt Affects Your Debt-to-Income Ratio
Student loan debt is among the debts which are used to calculate one of your most important financial metrics when you’re applying for a mortgage, called your debt-to-income ratio.
In the past, it was very unclear how student loan debt was meant to be calculated into this ratio. Some lenders would use the standard student loan repayment schedule, even if the borrower was paying a reduced amount or even nothing on an income-driven repayment program for a federal student loan.
Naturally, this would throw off the math in an unfair way. Even if you are paying significantly less than the underwriter was willing to acknowledge, your debt-to-income ratio would take a hit, possibly a severe one.
This in turn would take it more difficult to qualify for a loan with competitive interest rates and features, even though hypothetically, you should have been eligible for that loan.
Fannie Mae Specifies That the Actual Payment May be Used
Thankfully, it does not need to work this way anymore. In an announcement dated July 25, 2017, Fannie Mae offered some clarifications on the way that student debt is to be calculated when determining eligibility for a home loan.
Fannie Mae does not specifically order lenders to make calculations in a certain way but does make it clear that it is okay to use the actual monthly payment, even if it is $0.
Here is the relevant section from the document:
“In Announcement SEL-2017-04, we simplified our policy and changed how to handle student loan payments on the credit report with a missing or $0 payment amount. That policy stated the lender could use either 1% of the outstanding balance, or a calculated payment that would fully amortize the loan based on the documented loan repayment terms.
With this update, we are further updating this policy and providing lenders with some additional options. If the lender obtains documentation to evidence the actual monthly payment is $0, the lender may qualify the borrower with the $0 payment as long as the $0 payment is associated with an income-driven repayment plan.”
Note that the phrase “income-driven repayment plan” is quite specific in this case, referring only to such repayment plans for federal loans. If you have a private student loan, you cannot take advantage of this rule.
It also is worth pointing out that not every mortgage is subject to these guidelines, only agency-backed home loans.
Nonetheless, this applies to most home loans available. And since many students turn first federal aid in financing their educations, numerous borrowers can take advantage of this clarification of Fannie Mae’s rules.
So, if you have been concerned about your student loan debt holding you back from buying a home, it is worth considering whether these rules might help you to qualify for a competitive loan after all.
If you are making low monthly payments or no monthly payment on your student debt, that should be considered when calculating your debt-to-income ratio during the application process.
Looking for additional guidance, or ready to apply for a mortgage now? Please give American Pacific Mortgage, Inc. a call at (205) 495-0313. We look forward to helping you qualify for a competitive home loan in Alabama.
