Student loan debt can be a significant obstacle to homeownership.
But updates to existing programs and policies, as well as proposed new ones, aim to lift this burden and make getting a mortgage easier for borrowers.
Existing Programs and Policy Updates
Government-backed loan programs such as those from the Federal Housing Administration (FHA), Fannie Mae, Freddie Mac, VA, and USDA have been revised in response to the student loan crisis.
Here’s how these changes can assist prospective homebuyers grappling with student loan debt:
Federal Housing Administration Loans
In a considerable shift to aid lower-income borrowers and narrow the racial gap in homeownership, the FHA has relaxed its stance on student loan debt.
Learn More: FHA Student Loan Guidelines
Previously, the FHA program assumed borrowers were making monthly payments equal to 1% of their outstanding student loan balances. This calculation often inflated a borrower’s debt-to-income ratio, disqualifying otherwise creditworthy borrowers from FHA loans.
The new policy has abandoned the 1% assumption in favor of a calculation that better mirrors actual monthly payments. This adjustment is expected to significantly assist individuals across the nation and promote equity and opportunity in homeownership.
Fannie Mae Loans
Fannie Mae has updated its guidelines concerning student loan debt. If a monthly student loan payment is provided on the credit report or the student loan documentation, lenders can use that amount for qualifying purposes.
If the borrower is on an income-driven payment plan with a $0 monthly payment, the lender may qualify the borrower with a $0 payment.
For deferred loans or loans in forbearance, the lender may calculate a payment equal to 1% of the outstanding student loan balance or a fully amortizing payment using the documented loan repayment terms.
Freddie Mac Loans
Freddie Mac’s student loan guidelines require that all the borrower’s debts incurred through the note date be considered when qualifying the borrower.
For student loans in repayment, deferment, or forbearance, if the monthly payment amount is greater than zero, lenders use the monthly payment amount reported on the credit report or other file documentation.
If the monthly payment amount reported on the credit report is zero, lenders use 0.5% of the outstanding loan balance.
Related: Buying a House With Student Loans in Deferment
For VA loans, if the student loan is in deferment for at least 12 months beyond the closing date, the monthly payment does not need to be considered by the lender.
If the loan is in repayment or scheduled to begin within 12 months from the date of VA loan closing, the lender must consider the anticipated monthly obligation.
Typically, lenders calculate this by taking 5% of the outstanding student loan balance and dividing it by 12.
If the credit report shows a higher payment, the lender must use the payment reported on the credit report. But if the reported payment is lower, the loan file must contain a statement from the student loan servicer reflecting the actual loan terms and payment information.
For USDA loans, lenders must use the payment amount from the credit report or the documented payment if it’s above zero. But if the payment amount is zero, then lenders use 0.5% of the outstanding loan balance from the credit report or creditor verification.
This applies to all student loans, including those in “forgiveness” plans or programs and those paid by another party but in the applicant’s name.
Proposed Policy Solutions
In addition to these changes, there are proposed policy solutions designed to further address the student loan debt issue.
One significant proposal is the Transforming Student Debt to Home Equity Act of 2022.
This bill, which has not been signed into law, aims to allow first-time homebuyers to roll their student loan debt into a mortgage loan, providing a pathway to homeownership for those burdened by student loan debt.
While these existing and proposed policy updates are promising, there is still work to be done to eliminate the barriers to homeownership that student loan debt creates. Efforts must keep evolving and expanding to meet the needs of those burdened by student loan debt.
Related: Should I Consolidate My Student Loans Before Buying a House?