It’s no secret that the use of student loans to pay for college has mushroomed, so much so that 41 percent of first time homebuyers currently have student loan debt. Many more potential first time homebuyers are actually delaying homeownership—71 percent—because of concerns involving their student loans. With recent rule changes, they’ll be able to reconsider.
In late April, Fannie Mae, which determines the mortgage underwriting standards many lenders conform to, changed how student loan debt will be treated in evaluating applications. The result could make it easier to become a first time homeowner earlier and for current homeowners—including parents—to repay sooner.
Three Big Changes
Not only should the changes announced by Fannie Mae take the financial pressure off many first time homebuyers, and some homeowners, they take effect immediately.
1. Deflating the debt-to-income (DTI) calculation. In the past, if a borrower with student loans was taking advantage of an income-driven repayment plan to manage their monthly cash flow, that lower payment was not used in the DTI calculation. Instead, one percent of the loan balance was used. This is a big deal since DTI is a major factor in a loan’s approval and the interest rate charged on a mortgage. This typically overstated the amount of monthly income earmarked for student debt repayment by several hundred dollars. Now, Loan Officers can use the actual monthly payment amount that appears on a borrower’s credit report as long as it is above zero. This should help more potential borrowers qualify for mortgages.2. Recognizing third-party payers.
In instances where non-mortgage debt, like installment car loans or student loans, are being repaid on a borrower’s behalf by a third party, this debt may now be excluded from the DTI calculation. Borrowers, however, will need to provide documentation that this assistance was received for
more than 12 months. The change should help more applicants qualify for mortgages.
3. Using home equity for repayment. It is estimated that 8.5 million American homeowners have student debt. This number includes parents who helped pay for their children’s education. These borrowers already had the ability to use home equity to repay their student loans by using a cash-out refinancing option. Now, they will be able to do so more easily and without an additional fee.
A More Common Sense Approach
The recent changes should benefit those borrowers who have delayed homeownership due to their student loans. For parents or those who went back to school and may have been having trouble accessing their home equity as a repayment source, this more common sense approach also offers welcome assistance. Talk to a Loan Officer today about how Fannie Mae’s changes would impact your situation. Relief may be closer than you think.