It’s one of the more common dilemmas these days – you graduated college and you’re ready to start a family (or at least buy a home for your dog), but student loan debt is holding you back.
Further complicating this is the fact that student loans are paid off in all types of different ways, with some loans deferred and others containing repayment terms that are income-driven.
Whatever the case, these student loans have proven to be yet another roadblock to homeownership, with down payment probably still the number one hurdle.
Of course, with a wider availability of zero down home loans, 1% down mortgages, and 3% down mortgages available today, down payment is becoming less of an issue.
Freddie Mac Student Loan Guidelines Might Get Tougher
- Freddie Mac used to allow the actual student loan payment
- Listed on the credit report for qualifying purposes
- But now they’ll use the greater of the actual payment or 0.5% of the original balance
- Whichever figure is higher
At the moment, student loans in repayment must use the actual monthly payment listed on the credit report. If a payment isn’t listed for whatever reason, the lender must obtain documentation to verify the payment.
Going forward (January 18th, 2018 or sooner if adopted earlier), lenders will need to use the greater of the monthly payment listed on the credit report or 0.5% of the original student loan balance (or outstanding balance), also whichever is greater.
The good news is that the lender will no longer need to track down documentation if a monthly payment isn’t listed on the credit report.
The potential bad news is that the calculated monthly payment could be higher, thereby increasing the borrowers DTI ratio. In short, that means it could limit how much you can borrow.
For student loans in deferment or forbearance, Freddie Mac currently uses 1% of the outstanding balance of the student loan if no payment is found on the credit report (and there’s no documentation regarding a proposed monthly payment elsewhere).
As per this change, they will now use the greater of the monthly payment reported on the credit report or 1% of the original loan balance (or outstanding balance), again, whichever is greater.
This will likely make it slightly harder to qualify for a mortgage in some cases, though it should reduce the paperwork burden and confusion, and provide for a healthier lending environment.
Essentially, they don’t want a borrower with student loan debt to get a free pass and then experience payment shock once they owe thousands a month on their student loans.
Freddie Mac is now explicitly addressing student loan forgiveness, cancellation, discharge, and employment-contingent repayment plans as well.
In short, student loans with 10 or fewer monthly payments remaining until they’re forgiven, canceled, or paid, or student loans that are deferred/in forbearance and due to be canceled/forgiven/paid at the end of that deferment, can be excluded from the DTI ratio.
However, documentation must be provided and the borrower must meet the requirements for student loan forgiveness, cancellation, discharge or an employment- contingent repayment program.
What If Someone Else Is Paying Your Student Loans?
- If a third party has been paying your student loans (or certain other loans)
- Such as a parent or other family member
- You can exclude the payments from your DTI
- As long as they’ve been making them for at least the most recent 12 months
One last change, which could be a good one for some folks.
In light of the fact that is has “become more common” (Freddie’s words not mine) for borrowers to get help making monthly payments on certain liabilities (such as student loans), installment, revolving, and lease payments can now be excluded from your DTI ratio.
However, the party making these payments (let’s say the parents of the borrower) must have been making timely payments for at least the most recent 12 months.
Additionally, they will now exclude mortgage debt from the DTI ratio when another party has been making on-time payments for the most recent 12 months.
And Freddie will no longer require the borrower to be a cosigner or guarantor on that excluded debt.
So there are situations where these changes can help a would-be home buyer with student loan debt qualify for a mortgage. But there are also cases where it’ll become more difficult.
In any case, it should be easier for lenders to navigate, and it should promote a safer housing market.
If all else fails, there’s also Fannie Mae, which has its own student loan guidelines. Oh, and there’s always Lennar, a homebuilder willing to pay off your student loans if you buy a house from them.