Did you know that Student Loan Balances affect your home affordability even if they are deferred?
Historically, for some mortgage products, mortgage lenders could overlook deferred student loans on when calculating a mortgage applicant’s debts for determining affordability. Overlooking the debt completely was causing a lot of defaults on Student loans when the loan holder no longer qualified for deferral. They had acquired so much other debt when the student loans came due, they could not afford them. Federal Student loans were being defaulted on at an alarming rate, in 2016 the rules changed. Dramatically. Starting July 1st, 2016, mortgage lenders were required to count 1% of the total unpaid loan balance as active debt obligation regardless of the active payment plan amount or if the loans were deferred. People who had been pre-approved for a mortgage on June 20th were denied on July 2nd because that 1% student loan addition increased their debt calculation so dramatically, the mortgage was no longer considered affordable. This is a logical rule for deferred loans, the borrower will eventually have to make the payments and the federal government is trying to protect their investment. The problem is, many people with deferred student loans have them deferred for many reasons: They are still students, working full time and working on their degree, they have children and a limited income, they have had a medical or financial hardship. There are lots of reasons. But MOST people have student loans that are in a repayment plan that is lower than 1% of their outstanding balance. The plan could be Income driven, Graduated or Interest Only. Still, the lenders were required to count 1%. For example, a $60,000 student loan debt extended payment may be $325 per month, but the lender was required to calculate $600/month. A significant, non-existent increase in debt payments.
I worked with a mortgage applicant (Ms. M) who paid $239/month on $93,000+ student loan balances. Ms. M is a single mom, had 5 children, worked 2 jobs and earned over $60,000 per year. She had her own loans and Parent Plus loans for some of her children. On her income driven repayment plan, her payment would only go up if her income went up. Because she works in the medical field, her own student loans are eligible for forgiveness after 120 interest only payments. She knew the home would be affordable in the long term.
On June 20, 2016, Ms. M was in contract on a home that was affordable counting her $239 per month payment. The rules changed July 1, 2016, and she was denied on July 2nd because the lender was required to calculate a $930 assumed payment.
Thousands and thousands of potential homebuyers were no longer eligible for mortgage loans because of debt payments they were not currently paying based on a calculated payment they would not necessarily ever have to make. Loans affected by these rules were both conventional (Fannie Mae & Freddie Mac) and FHA/VA/USDA etc. These rules stayed in place, unchanged, for 10 months.
In April 2017, Fannie Mae and Freddie Mac went back to the drawing board to loosen up the rules. Fannie Mae and Freddie Mac ruled that they would count ACTUAL payments as reflected on your credit report or the Student Loan Statement. They have allowed lenders to go back to actual payment calculations. But. deferred loans are still an issue and still need to be calculated that 1% of the total loan balance. These rules may still be subject to change because the 2016 change was so crippling for so many, but for now, there are workarounds. If you are shopping for a home and your loans are still in deferral, you will want to contact your Student Loan Provider and get a statement showing a payment amount. If you can get into an income driven payment plan, do it, or an extended payment plan will work as well. Some people can afford the 1% calculation but many cannot. If you are concerned, check with your lender about the options. While the loans have their own rules, different lenders may have additional rules, so before you take any action, consult your lender of choice to make sure you have what they need in order to work with you. You do not want your loan balances to derail your home search at the wrong time. Contact me with any questions, I am here to help!