Getting a college degree is considered one of the best ways to get ahead in the job world, but getting that college education is expensive. The cost of tuition and living expenses keeps going up each year, and most students don’t have the funds, or the rich relatives, to pay for the costs as they go. This means that many people need to borrow to pay for school. This plan can work well if they get out of school and are able to get a good paying job. But for many millennial buyers, they have been caught in a situation where it took longer to get established in the job market, and they still had student loans to pay off. This is one of the reasons that millennial buyers have taken longer to buy their first homes, than previous generations. When starting out after school, most people are starting out with lower paying jobs, and a good portion of their income is going toward expenses. To make things harder for those looking to buy their first homes, Fannie Mae changed their guidelines a few years back, and required that we need to count fully amortizing student loan payments into their debt ratio, even when buyers are paying less. This was a reaction to the foreclosure crisis, but it had the effect of making it harder for many buyers to qualify for a mortgage.
There is now some great news for Chicago area first time homebuyers, or anyone with student loan debt who is looking to buy a home. Fannie Mae has rolled back their rules and issued new guidelines, which means that many buyers who were not able to buy a home, may now be able to buy, and afford a home. Fannie Mae (FNMA), is a government backed organization that (along with their counterpart, Freddie Mac) buys back a substantial amount of the mortgages after they are closed. They are the 800-pound gorilla in the mortgage market. As so, they make the rules that buyers need to adhere to when qualifying for a conventional loan. For years, they looked at student loans as a debt to be counted, but only based on what the borrower was actually paying for the loan. Many borrowers have student loans, but pay for them based on their income, so they are paying a relatively small payment compared to their total student loandebt. Other borrowers had student loans, but were still going to school, so the payment was deferred, and they often went for years without having to make any payments.
When the foreclosure crisis hit, Fannie Mae looked at student loan debt as another risk that could send people into default, and they upped their requirements so that even if the payment was lower, when someone was qualifying for a mortgage, we had to hit them for an amortizing payment of 1% of the loan amount to be charged as a monthly debt. The new policy will allow lenders to use the payment the borrowers are actually paying, which is often lower, instead of the larger amortizing payment.
Here are the new changes to Fannie Mae’s student loan qualifying:
- If your student loan payment amount is listed on your credit report, then we can use this amount, even if it is not a fully amortizing payment. Many borrowers have student loan payments based on their income. Fannie Mae will now accept these payments. If there is no student loan listed on the credit report, or if it as listed as $0, we will need to document that that is correct, and we will then use $0 as your qualifying payment.
- If a parent or someone else is making the full payment for you, we will have to document (using canceled checks) that they have been making that payment over the last 12 months, but will then not have to count that debt against you.
- Fannie Mae also has come out with a plan where homeowners with student loan debt can use a cash out refinance to pay off their student loan debt.
All in all, these are some great changes that will allow people that might not have qualified before, to be able to buy a home. Let me know if you have any questions on how this works, or want to see how these guideline changes will affect you when you are ready to buy a new home.
Peter Thompson Team at loanDepot