Have you tried to buy a home with a big student loan balance?

Click here to read this story at MagnifyMoney.com

Getting a mortgage while holding student loan debt can be tricky — and not just for the obvious reason (a big loan payment can be a budget killer).  When making mortgage decisions, lenders sometimes don’t know how to treat all the various repayment plans that student borrowers can utilize.

Recently, I wrote about some changes that might help would-be home buyers in this situation for MagnifyMoney.com. Basically, borrowers on reduced income-based repayment plans — there’s about 6 million of them — will get a break now.  There’s a short excerpt below, but you can read the full story at MagnifyMoney.

The story ended up being more complicated than I expected, and that had me wondering: what is it really like buying a home when you (and your partner?) have student loans?  Please let me know in email or in comments below.

Here’s an excerpt:

 Student loan borrowers who are making reduced income-driven repayments on their loans will have an easier time getting mortgages under a new policy announced recently by Fannie Mae.

Nearly one-quarter of federal student loan borrowers benefit from reduced monthly student loan payments based on their income, Fannie Mae says. However, there’s been some confusion about how banks should treat the lower monthly payments when they calculate a would-be mortgage borrower’s debt-to-income ratio (DTI): Should banks consider the reduced payment, the payment borrowers would have to pay without the income-based “discount,” or something in between?

It’s a tricky question, because student loan borrowers have to renew their qualification for the lower payments each year, meaning a borrower’s monthly DTI could change dramatically a year or two after qualifying for a mortgage. The banks’ confusion over which payment amount to use can mean the difference between a borrower qualifying for a home loan and staying stuck in a rental apartment.

There’s even more confusion when a mortgage applicant qualifies for a $0 income-driven student loan payment, or when there’s no payment amount listed on the applicant’s credit report. Previously, in that situation, Fannie Mae required banks to use 1% of the balance or a full payment term.

As of last week, Fannie has declared that mortgage lenders can instead use $0 as a student loan payment when determining DTI, as long as the borrower can back that up with documentation.

That announcement followed another Fannie update issued in April telling lenders that they could use the lower income-based monthly payment, rather than a larger payment based on the full balance of the loan, when calculating borrowers’ monthly debt obligations.

About Bob Sullivan 1077 Articles
BOB SULLIVAN is a veteran journalist and the author of four books, including the 2008 New York Times Best-Seller, Gotcha Capitalism, and the 2010 New York Times Best Seller, Stop Getting Ripped Off! His latest, The Plateau Effect, was published in 2013, and as a paperback, called Getting Unstuck in 2014. He has won the Society of Professional Journalists prestigious Public Service award, a Peabody award, and The Consumer Federation of America Betty Furness award, and been given Consumer Action’s Consumer Excellence Award.

3 Comments

  1. My husband and I bought our first home 21 years ago while I was in “Year 5” of a 10 year student loan repayment plan.

    We provided lots of documentation regarding my payments, income, savings……. we were put through sheet torture……

    I remember having to pay extra for PMI (until we were able to get rid of it through a refinance)……

    I don’t envy anyone trying to buy a home in today’s environment….. especially with outstanding student loans….. and “scholars” wonder why home ownership is decreasing over time…..

  2. I recently bought a home with student loans. The problem with student debt is that it throws your debt to income ratio out of whack.

    Fortunately, Freddie Mac is now permitting the use of income-driven repayment plans when calculating your DTI. For people with large federal balances such as myself, it makes a huge difference.

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