Fannie Mae Announces Student Loan Debt Solutions

Posted by Brittany Carr on Thursday, May 18th, 2017 at 12:37pm.

Written by Robert H. Ruth

This is a BIG Deal for Homebuyers in General, Millennial Buyers in Particular

Last week I provided an overview of the scope of the student loan debt situation in America and nowhere is the situation as impactful as when someone with student debt tries to purchase a home. This issue alone has held the housing market back from a truly significant rebound, and is putting the millennial generation behind their parent’s generation in creating wealth for their futures.  

In a recent announcement, Fannie Mae has publicly stated that they intend to be part of the solution by “implementing new policies to help borrowers qualify for a home loan and reduce student debt.”

Here is a link to the official press release by Fannie Mae

Prior to this announcement, when a borrower tried to qualify for a mortgage, the monthly payments on their student loans, even those that have been deferred, had to be included in their debt to income qualifying ratio. This was a big deterrent to obtaining financing because Fannie Mae had instructed lenders to manually calculate a payment that was equal to 1% of the outstanding total balances on student loans. So if a student had $50,000 in total loan indebtedness, the monthly payment lenders had to calculate was 1% of $ 50,000 or $500 monthly.

Fannie Mae’s announcement is so important because it directs lenders to accept the debt payment listed on the credit report, and states that there is no need to manually calculate 1 percent of the loan balance in most cases.  They go on to state that with a different approach to qualifying, lenders may be able to serve more borrowers.  

To illustrate how this change will help borrowers with student debts qualify, I’ve provided the following scenario in which a married couple, each with $35,000 in student loans, has been working for several years, saving their money to buy a home.

  • Their combined incomes are $ 84,000 which is $ 7,417 monthly.
  • The monthly minimum payments on their auto loans and credit cards is $ 900.
  • For this scenario, we will assume monthly mortgage escrow account payments of $ 500 for real estate taxes, and $125 for homeowners insurance and $130 for PMI
  • Borrowers are making minimum payments based upon their incomes on their student loans which are reflected on their credit reports. These payments total $ 200 monthly
  • Using the accepted total debt to income ratio of 43% as a guide, the total monthly debt for this couple would be $ 3189.31 ( $7417 x 43% = $3189.31)

The table below compares the amount of mortgage the borrowers would be able to obtain based upon their student debt payment calculations before the announcement by Fannie Mae and after the announcement.  As the chart shows, there is a significant impact upon a borrower’s ability to qualify for financing under these new guidelines.


 

Old Guidelines

New Guidelines

Total debt at 43% of monthly income

$ 3189.00

$ 3189.00

Subtract car loan and credit cards

-    900.00

-    900.00

Subtract escrows for taxes, insurance and PMI

-    755.00

-    755.00

Subtract monthly student loan payments

-    700.00

-    200.00

Amount left for P/I on a mortgage

$    834.00

$ 1334.00

Mortgage Amount on this payment @ 4.25% for 30 yrs.

$  169,532

$ 271,171


  • So the impact of this change is indeed a big one for homebuyers with student debt.
  • This scenario uses the assumption that the borrowers are making minimum required payments on their student loans and that the minimum payments are shown on their credit report
  • In the above scenario, this homebuyer can now qualify for $101,600 more on their mortgage at the same interest rate…an increase of almost 60% !

This is certainly a step in the right direction for assisting first time buyers who want to purchase a home.  For more insights into the home buying process, or to head in the right direction on your home loan please feel free to contact me.

Robert H. Ruth
Senior Mortgage Banker
Direct: 401.789.4441
Mobile: 401.743.4364
Email: rhr11@icloud.com
NMLS ID: 513243






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