How they can help make the process easier
For millions of Americans, obtaining the dream of homeownership has always seemed out of reach. The reasoning is simple—for many, student loan debt makes homeownership an unattainable goal until those loans are completely wiped clean; but, new mortgage guidelines are changing all of that. In July 2017, Fannie Mae changed underwriting rules that altered the way mortgage lenders look at student loan debt.
What is the New Rule?
Mortgage lenders look at debt-to-income ratio when deciding who is qualified for mortgages and home loans. This calculation (total monthly debt payments divided by monthly income) is used to determine whether an applicant has enough money each month to pay their debts and their mortgage.
Many Americans were having issues qualifying for mortgages due to student loan debt because mortgage lenders were unsure of how to deal with educational debt. Some lenders would look at the actual amount owed, while other lenders looked at monthly payments, while others still calculated a unique amount based on repayment plan information and the exact amount owed on the loan. There was no set answer, leaving many potential buyers disappointed when a mortgage lender rejected an application.
Fannie Mae has since clarified that lenders can look at income-based repayment plans, and utilize the monthly payment in their debt-to-income ratio calculations. If you are currently paying just $50 per month in student loans, that is the amount mortgage lenders will now use in your DTI calculation, instead of the total amount due under a traditional payment plan. This new guideline will help individuals on income-driven repayment plans.
How Will it Change Buyer Options?
For potential buyers who are on an income-driven repayment plan, qualifying for a mortgage may become easier. Now that mortgage lenders will look at the income-driven payment amount, rather than the total amount owed, more buyers could potentially qualify for loans. By reducing the debt-to-income ratio of buyers, more buyers will qualify for mortgages.
Now, while this new rule will help many buyers, it isn’t a magic bullet for procuring a mortgage. Potential buyers should always check their credit report, and make note of discrepancies. If there appear to be mistakes on your credit report, it is essential to contact the credit bureau and discuss your options for getting inaccurate information removed.
Potential buyers will also need a good credit score, a solid history of loan and debt repayment, and a verifiable, lengthy work history to qualify for a mortgage or housing loan. Buyers who are concerned about their potential qualifications should make an appointment to meet with a mortgage lender or financial planner. Both professionals can help you sort out your current finances and your loan or mortgage options.
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