August 1st, 2017 6:15 AM by Jackie A. Graves
For millions of Americans drowning in student
loan debt, the prospect of getting a mortgage might seem out of reach. Last
week, Fannie Mae changed underwriting rules that could make it much easier
for people with student loan debt to qualify for a mortgage. Here are the
Who Does This Impact?
The new rule impacts people with federal student
loan debt who are currently on an income-driven
repayment program. An
income-driven repayment plan sets your monthly student loan payment at an
amount that is intended to be affordable based upon your income and family
size. Depending upon the plan, your monthly payment could be capped as low as
10% of your discretionary income. And if your discretionary income is low
enough, your monthly payment could be as low as $0.
What Has Changed?
In order to qualify for a mortgage, a borrower
needs to meet certain debt-to-income (DTI) requirements. That seems simple
enough. However, there was confusion regarding federal student loan debt on an
income-driven repayment program. When calculating a debt burden, should the
underwriter include the standard student loan payment, the reduced payment, or
something in between?
The new statement from Fannie Mae makes it clear: the reduced payment can be used,
even when the payment is $0. According to Fannie Mae, "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."
This is important, because the payment
calculation for a student loan (10% of the discretionary income) is different
from the DTI requirement of a mortgage. Many Americans could find it easier to
qualify for a mortgage while in student loan debt.
Michigan-based mortgage broker Cassandra Evers told
MagnifyMoney that the changes “allow a lot more borrowers to
qualify for a home.” Previously, there was a lot of confusion among borrowers,
lenders, and brokers, Evers said. “[The rules have] changed at least five or
six times in the last five years.”
Apply To All Mortgages?
No, this does not apply to all mortgages. These
rules are part of the Fannie Mae "seller’s guide," which establishes
the minimum criteria for mortgages to be sold to the government
agency. Lenders can be tighter than the minimum requirements. In addition,
many banks offer products that are not meant for sale to Fannie Mae or Freddie
Mac, which means these rules do not apply.
But don’t despair: agency-backed
mortgages represent more than half
of the mortgage market, which means
the impact of the rule will be significant and widespread.
What If I Don’t Have A Federal Loan?
Unfortunately, none of these changes will help
people with private student loans. As a general rule, student borrowers should
max out federal loans before considering private loans. And you should be very
careful before refinancing a federal student loan with a private lender.
Current refinance rates are as low as 2.66% variable. Proceed cautiously: you might get a
lower rate today by refinancing, but you will give up access to income-driven
repayment programs in the future. The higher interest rate is an insurance
policy. You will just need to decide if you want insurance against a possible
future loss of income.
By Nick Clements - To view the original article