National Association of Realtors Research Department and SALT have published the results of Student Loan Debt and Housing Report. This survey looks at how student loan debt affects buying a new home. Of those responding, 71 percent say student loans are the primary reason they put off buying a home. This includes those who are on schedule in repaying their student loans.
Furthermore, student loans have been a factor when a customer applies for a mortgage. But all has changed thanks to Federal Housing Administration and Fannie Mae.
FHA has reduced the 2 percent of the outstanding debt for deferred loans to 1 percent. Prior to the change, lenders would include the 2 percent of the student loan amount in the debt-to-income calculation. In other words, for every $10k owed, the homebuyer would pay $200.
One percent may not sound like much, but it adds up especially with a large student loan debt. According to Student Loan Hero, the average student loan debt for the class of 2016 is $37,172. Two percent of that is $743. Half of that, or 1 percent, is $371. That’s a big chunk of change.
And like the sales people like to say … that’s not all!
Fannie Mae has announced three options that will help borrowers with student loan debt. The most impressive thing about this is that it’s possible for individuals who weren’t the students to be involved.
Student Loan Cash-Out Refinance
Homeowners can convert student loans into housing debt that has a lower interest rate. They do this by refinancing their home through a Fannie Mae-backed lender. They use the equity from their home to pay off student loans. The advantage of this option is that borrowers don’t pay the typical additional fees that come with cash-out refinancing.
This applies to mortgage refinancing to pay student loans. Thus, a parent could refinance a home to pay off the child’s student loan debt. It even doesn’t have to be a family member who pays off the debt.
Debt Paid by Others
Borrowers can increase their chances of receiving a home loan when their debt-to-income ratio is excluded from calculations. That can happen when someone else pays the borrower’s non-mortgage debt. For example, if a borrower’s parents are paying the borrower’s student loan, auto loan, or credit card debt, then the debt-to-income ratio from these debts will be exempt.
To take this route, the borrower will need to provide documentation showing a third party making payments for more than 12 months. Employers may pay off student loans as it would count as debt paid by others.
Student Debt Payment Recalculation
Previously, lenders backed by Fannie Mae assumed that borrowers with student loan debt paid at least 1 percent of their loan balance. Instead of assuming, lenders can see the actual loan payments on credit reports. This increases borrowers’ chances of qualifying for a mortgage especially when it’s lower than 1 percent of their loan balance.
Some borrowers pay less than 1 percent of their loan balance because of federal student loan programs. These allow students to pay based on their income, instead of the typical 10-year repayment plan.
These changes from Fannie Mae and FHA make homeownership a reality for those still paying student loans. So those with student loan debt may want to talk to mortgage lenders and start looking at new homes in DFW.