Applying for a mortgage loan when you're also paying off hundreds of dollars of student loan debt can be a challenge. But a new mortgage program and other recent changes by mortgage giant Fannie Mae could make it easier.
Though one of these new programs is limited in scope, its debut along with Fannie Mae's more expansive changes provide some hope that student loan debt won’t always be such a hurdle for borrowers applying with mortgage lenders.
"Student debt has often been a great obstacle in the home-buying process," said Mark Greco, president of 360 Mortgage Group in Austin, Texas. "In fact, many experts point to student debt as one of the major reasons Millennials are waiting longer to buy their first home."
The student loan hurdle
Steve Hovland, director of research for Irvine, California-based HomeUnion, said that student loan debt has slowed growth in the U.S. housing market. He pointed to the percentage of first-time buyers in the housing market as evidence of this. During the past 40 years, he said, first-timers have made up about 40 percent of the housing market.
Since the housing downturn, though, only about 30 percent of buyers are considered first-time homebuyers. Student loan debt has played a role in this. The Federal Reserve says that since 2000, the amount of outstanding student loans has doubled, with U.S. residents owing $1.45 trillion in student debt. More than 10 percent of these loans are delinquent, removing those potential buyers from the housing market, Hovland said.
"We do not expect to see Millennials pull their weight to get the first-time buyer percentage back to historical trends during this decade," Hovland said.
There's a simple reason why student loan debt is such a hurdle for borrowers: Lenders don't want your monthly debts to be too high. Most want these debts, including your estimated new mortgage payment, to be no more than 43 percent of your gross monthly income. If your student loan debt pushes your debt-to-income ratio past this mark, it might knock you out of consideration for a mortgage.
That's why the changes by Fannie Mae and the new mortgage program by Eagle Home Mortgage, a subsidiary of national homebuilder Lennar Corporation, are important: They prove that lenders, if they get creative, can offer relief to borrowers struggling with student loan debt.
Eagle Home Mortgage in September launched its Student Loan Debt Mortgage Program with the goal of making owning a home an easier task for borrowers who are also paying off student loans. The mortgage will pay off as much as $13,000 in outstanding student loan debt of the borrowers who are approved for it.
Borrowers taking out such a loan can use up to 3 percent of the home's purchase price to pay off their student loans. There's a big limiting factor here, though: Borrowers can only use the student loan mortgage to buy a home from Lennar. The home builder will contribute the 3 percent figure, something that won't increase either the price of the home or add to the balance of the mortgage.
There are other limitations, too. Parents who took out loans to pay for their children's college education are not eligible for this loan. Borrowers can also take out a maximum loan of $424,100 through the program.
Jimmy Timmons, president of Eagle Home Mortgage, said that the program should make relieve some of the burden that younger buyers face as they begin their search for a home.
"Particularly with Millennial buyers, people who want to buy a home of their own are not feeling as though they can move forward," Timmons said in a press release. "Our program is designed to relieve some of that burden and remove that barrier to owning a home."
Fannie Mae’s changes
At the same time, Fannie Mae has unveiled its own solutions for student loan debt. First, lenders originating mortgages guaranteed by Fannie Mae do not have to count non-mortgage debt that others are paying on behalf of borrowers when calculating these borrowers' debt-to-income ratios.
That's a key for some borrowers with student loan debt. If these borrowers' parents have agreed to pay their student loan debt on their behalf, lenders no longer count as part of their debt-to-income ratio.
Not all borrowers have parents or others willing to pay off their student loans, of course. Fannie Mae's HomeReady loan can help these borrowers. Under this program, both first-time and repeat buyers only need a down payment of 3 percent of a home's purchase price, a help to buyers paying off student loans.
But in an even bigger change, lenders originating HomeReady loans can also count income from household members who are not listed as borrowers on the mortgage itself. Borrowers, then, can count income generated by their children, grandchildren or other extended family members if these members are part of the household.
Finally, and maybe most importantly, Fannie Mae has tinkered with the 1 percent rule. When determining the average monthly student loan payments of their borrowers in the past, lenders traditionally used a figure equal to 1 percent of these borrowers' outstanding student loan debt. That 1 percent figure was often higher than the actual amount borrowers paying each month, making their debt-to-income ratios higher than they actually were.
Fannie Mae now allows lenders to use the actual student loan payments that borrowers are making each month. If this actual payment is lower than the 1 percent figure, it will make borrowers' debt-to-income ratios more attractive to lenders.
Borrowers applying for FHA mortgages, though, will have to abide by the 1 percent rule, making it more challenging for them to qualify for these loans insured by the federal government.