Many student loan borrowers find it difficult to buy a house because of their student loan debt. In fact, 71 percent of student loan borrowers feel their student loan debt has delayed their decision to buy a home. For many, making the monthly payments toward their student loan debt prevents borrowers from saving up for a down payment. But another factor is the effect student loan debt has on the mortgage acquiring process.
Fannie Mae, one of the trend-setters in the mortgage world, recently announced three new plans to help student loan borrowers with home loans. The plans offer solutions to different situations, but they all should help alleviate difficulties student loan borrowers have when getting a home loan.
One of the big ways Fannie Mae is making it easier for student loan borrowers to buy homes is by changing the way they calculate student debt payments. They need monthly payment amounts to help them calculate debt-to-income ratios, which need to be at 43% or lower to qualify for a home loan. Previously, lenders would do one of three things to determine monthly payment:
For people on income-based repayment plans for their student loans, all three of these methods would result in inaccurate numbers, which would drive the debt-to-income ratio up and potentially disqualify them from getting a home loan.
In Fannie Mae’s new method, lenders can take the current payment listed on the credit report, which shows the correct payment amount based on the plan the borrower is enrolled in.
For co-signers of student loans in which payments are being made by someone else, Fannie Mae’s solution includes ignoring that debt. As long as the co-signer provides proof that someone else is consistently making those payments, lenders don’t include that debt when calculating the debt-to-income ratio, boosting the chances of that person qualifying for a home loan.
Of course, the borrower should do this with caution; as long as they are a co-signer, there’s always the possibility that they will have to start making payments. It’s a good idea to either build that into the budget before signing the papers to make the mortgage official or take steps to be removed as a co-signer from the student loans.
For homeowners who have student loan debt, Fannie Mae is offering refinance options to bundle some or all of the student loan debt in with the mortgage of the house. This simplifies the debt payments by lumping them into one, but it has downsides as well. Because mortgages have such long lives (often 30 years), and adding student loan debt essentially increases the mortgage total principal, more interest accrues and borrowers may end up paying more overall. Also, if the borrower can no longer make the larger mortgage payments, they risk losing their house.
Overall, it’s encouraging that more options for people with student loan debt are surfacing. Though some may see this move by Fannie Mae as a way to let people get more debt than they can handle, we advise that people get help with their loans and finances to make sure they are making the right move.
Options are available to help
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