As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
The end of college can be an exciting time. While we’re parting from our classmates and going our separate ways, it’s exhilarating to know we’re finally ready to take what we learned in the classroom and use it to make an impact on the real world.
What’s not nearly as exciting is the prospect of paying back our student loans. The cost of college attendance goes up every year and, with it, student debt.
There are 44 million Americans with $1.4 trillion in student loan debt. The average student graduates with $37,172 worth of loans to pay back. That debt has led some of us to delay a lot of things, including getting our first home.
Just because you have student loans doesn’t mean you shouldn’t be able to get out from under your landlord’s thumb, though. A new guideline from Fannie Mae makes it easier to qualify for a conventional loan by allowing you to exclude the loan from your debt-to-income (DTI) ratio if you’re on an income-based repayment plan with a $0 monthly payment. We’ll go over what the change means and the documentation you need to qualify.
The Importance of DTI
Your DTI is a huge key in determining the amount of your mortgage approval. In short, it measures how much of your monthly income goes toward paying off debts like personal, student and car loans as well as revolving debt like credit cards.
In order to figure out your DTI, lenders look at your monthly income from W-2s and tax returns and compare it to the debts reported on your credit report.
Let’s do a quick example to show you how this works.
Let’s say you make $60,000 per year (before taxes are taken out), or $5,000 per month. Each month, you pay $350 on a car note, $400 for a personal loan and $200 on a student loan, and you have a $100 minimum payment between a few credit cards. That makes your DTI 21% ($1,050/$5,000).
The lower your current DTI, the better. For example, Fannie Mae guidelines allow you to qualify with a maximum DTI of up to 50% of your monthly income once the monthly mortgage payment is added in. Of course, you may not want to push the upper limits of your approval because you want to leave room in your budget to save for the future as well as for emergencies. Don’t push past your wallet’s comfort zone.
However, the lower your current DTI, the more home you can afford. This will give you flexibility in terms of the homes you can look at when it comes time to get your preapproval and go house shopping.
Now that you have an understanding of DTI, let’s move on to the change being made.
Change for Those with Income-Based Repayments
Fannie Mae has made a guideline change stating that if you are on an income-based repayment plan for your student loan, lenders can use the payment on the statement to qualify you. Importantly, this includes $0 payments. This means that if you pay nothing toward your student loans at the moment based on your income, it doesn’t add to your DTI.
In order to qualify with a student loan payment of $0, we have to have documentation from your loan servicer that you’ll continue to have a $0 payment on your student loan.
If you have anything other than a $0 payment, you can still get a mortgage. It’s just that the payment will be added into your DTI.
For those of you with student loans, the Fannie Mae change is very good news. If you think you’re ready to buy a home, you can get your application started online. If you’d rather speak with one of our Home Loan Experts via phone, you can give us a call at (800) 785-4788. Feel free to leave your questions for us in the comments.
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