Inflation is a fact of life. I’m sure our grandparents didn’t expect to pay $0.50 for a gallon of gas forever. Still, the cost of some things seems to be rising faster than others. College tuition is one of those things.
Student loan debt is up 302% since 2004, because of the rising costs of getting a degree, according to ValuePenguin. The average student loan debt is $32,731, according to the most recent available data. The median debt isn’t as bad, at $17,000, but it’s still enough that some young people have delayed getting a place of their own.
Freddie Mac, one of the major backers of U.S. mortgages, has changed its guidelines to make it easier to qualify for a mortgage if you have student loan debt.
We’ll get into what changed and why it could make a significant difference below, but know that if student loan debt has kept you from qualifying for a mortgage, it may be time to try again.
Qualify with Lower Student Loan Payments
Let’s dig into what changed.
First, a student loan statement can now be used to prove that the monthly payment is lower than what’s reporting on your credit as long as the payment showing on your credit report is more than $0. This is a win, because Quicken Loans when we calculate your debt-to-income ratio (DTI) as opposed to basing it on paying off a certain percentage of the loan amount every month which could make your monthly payment higher for qualification purposes.
DTI is a ratio comparing your monthly debt payments –for installment debt like your car or home and for revolving debt like credit cards – to your monthly income. It’s expressed as a percentage. The lower this number is going into the mortgage process, the more you can afford to spend on your home.
If your payment is reporting as $0 on your credit report, mortgage investors assume you’ll be paying off a certain percentage of your loan balance every month. Under the old guidelines, Freddie Mac assumed that 1% of your student loan would have to be repaid every month. That payment percentage has now been lowered to 0.5% of the outstanding balance shown on your credit report.
Finally, Freddie Mac has simplified its guidance. This means these guidelines apply across the board. Whether you’re currently repaying the loan, or the loan is in deferment or forbearance, these are the requirements Freddie follows in determining a client’s ability to qualify for a mortgage.
To quantify what these changes mean and make things more concrete, we’re going to run through an example.
The guidelines may vary based on the loan you’re getting and other qualification factors, but in general, keeping your DTI at or below 43% gives you the best chance to qualify for the most possible loan options.
For the purposes of our scenario, let’s assume the following. You have $60,000 in annual income. You have a $350 car payment, a $600 payment on a personal loan, $700 in monthly credit card balances and a $40,000 outstanding balance on your student loans with no payment showing on your credit.
Under the old student loan guidelines, you would have qualified with a $400 monthly student loan payment (1% of the outstanding balance). Given this, your total DTI, the ratio of your total monthly debts compared to your monthly income would be 41% ($2,050/$5,000).
With the same situation under the new guidelines, your student loan payment would be 0.5% of the outstanding balance, or $200 per month. Assuming all other figures remain the same, this brings your DTI down to 37% ($1,850/$5,000) which gives you more room in your budget to handle a higher house payment if you need to.
If you’re interested in getting a mortgage under these new guidelines, you can start your application online or give one of our Home Loan Experts a call at (800) 785-4788. If you have any questions, you can leave them for us in the comments below.
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