With outstanding balances of over $1.4 trillion, student debt is on the rise and is the second leading form of debt in the United States behind mortgage debt. From a balance of around $480 billion in 2006, student debt has almost tripled over the last 10 years. So how does this affect someone trying to finance a home purchase?
Student loans are debt and need to be considered in a borrower’s debt to income ratio when applying for a mortgage loan. Up until late April this year, Fannie Mae required that on a conventional mortgage loan the borrower’s monthly payment needed to be calculated to reflect at least 1% of the outstanding balance of the debt, regardless of what payment was reporting on a credit report. Now, for conventional mortgage loans, they are allowing payments which are reporting on education loans to be used for debt to income purposes even if the monthly payment is less than 1% of the outstanding balance.
Imagine someone that is just starting out in the medical industry that has $200,000 of student debt and the credit report is reporting a $1,000 monthly payment. The old guidelines would require the monthly payment to be calculated at $2,000 even though the bureaus were reporting $1,000. Now, for conventional loans, lenders can use the lower payment which is reporting on a borrower’s credit report. In the above example, that would reduce the borrower’s monthly debt obligations by $1,000, potentially increasing that borrower’s price range by over $150,000! This is a substantial change for the real estate industry as it will lead to increased affordability for borrowers with high student loan balances and low monthly payments.
