Buying a House with Student Loan Debt
Are you a first-time homebuyer who is concerned about whether you will qualify for a mortgage given your substantial student loan debt? If so, fret not, there is hope! Recent changes to loan requirements have made it easier for buyers with student loans to qualify for home loans.
Up until recently, it didn’t matter what you actually paid monthly towards your student loans. Lenders, instead, would typically use a standard formula to calculate your monthly student loan payments when considering whether you could afford a monthly mortgage payment. They would calculate your monthly payment as 1% of the balance of your student loan (the, “1% Rule”). Since many graduates use “income based repayment plans” that allow you to pay a fraction of what you would under the standard student loan repayment plans, often times, the amount you were actually paying towards your student loans was significantly lower than the 1% lender calculation. This was a heavy burden to overcome considering most Lenders required a debt-to-income ratio below 45%, which most graduates were unable to meet as long as lenders were using the 1% Rule. The debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. This is how lenders measure your ability to manage the payments you make every month to repay the money you have borrowed.
As a result of the “1% Rule” and the debt-to-income ratio requirements, most buyers with student loans couldn’t qualify for a mortgage. The good news is that Fannie Mae finally caught on that these regulations were archaic and unfairly disqualifying many graduates fully capable of buying a home and also repaying their loans. Fannie Mae eased their regulations in two key ways for buyers with student loans. First, under the new rules, your total monthly debt-to-income ratio increased to 50%, with some loan programs, such as ‘FHA’ loans, pushing it even higher to 55%. Additionally, Fannie Mae scrapped the 1% Rule and instead allow lenders to use the actual amount of your monthly student loan payments to calculate your debt-to-income ratio.
These changes provide much needed relief to recent graduates like you who are looking to purchase their first home but are saddled with student loan debt. The takeaway: you very well may be able to purchase a home despite your student loan debt! Be sure to speak with a trusted loan officer. They will go through your numbers and be able to let you know how much of a loan you may qualify for.
Written By: Dominic Poncia, Esq.
WARSHAW, DI CARLO & ASSOCIATES, P.C.
77 Newbury Street, Boston, MA 02116
(617) 262-7800 (p); (617) 395-2706 (f)