After pursuing college degrees many consumers find themselves weighed down by their student loan debt, which often inhibits their ability to purchase a home. A recent study by the National Association of Realtors (NAR) and American Student Assistance found that many millennials are delayed by seven years to purchase their first home due to their monthly student loan payment.
Monthly student loan payments can total hundreds of dollars each month and often leave millennials struggling to save for a down payment. The NAR found that “78 percent of older millennials believe their ability to purchase a home was impacted and 66 percent of younger millennials say their ability to change their living situation was impacted by their student loan debt.”
“The tens of thousands of dollars many millennials needed to borrow to earn a college degree have come at a financial and emotional cost,” NAR’s chief economist, Lawrence Yun, said in a statement. “Even a large majority of older millennials and those with higher incomes say they’re being forced to delay homeownership because they can’t save for a down payment and don’t feel financially secure enough to buy.”
Luckily this year, Fannie Mae, which determines the mortgage underwriting standards lenders conform to, has updated their standards for how student loan debt is evaluated. The three main updates are:
Deflation of Debt-to-Income (DTI) Calculation
Previously, if a borrower had an income-driven student loan repayment plan, their lower payment was not used in the DTI calculation. Instead, underwriters used one percent of the loan balance. This often results in an overstated amount of monthly debt repayments. Since DTI is a huge factor in a loan’s approval and the interest rate charged, this greatly affected borrower’s lending options. According to the new updates, lenders can use the borrower’s actual monthly payment amount as long as it is above zero, which should help potential borrowers qualify for mortgages.
Recognition of Third-Party Payers
For borrowers with non-mortgage debt, such as car loans or student loans, that are being repaid on their behalf by a third-party, this debt can be excluded from Fannie Mae’s DTI calculation. The only caveat is borrowers must show documentation that the third-party has been assisting with re-payment of this debt for more than 12 months.
Acceptance of Home Equity for Repayment
Many borrowers have used Home Equity Lines of Credit (HELOC) as a means to repay their student loans and other outstanding debts. Fannie Mae now offers simpler eligibility terms and reduced fees designed to provide additional options for borrowers with student debt.
Talk to a loan advisor today about how Fannie Mae’s new updates can impact your lending options.