It’s tough out there for students. Take it from me, a millennial who has collected a bachelor’s degree and a master’s degree, as well as a bit of debt along the way. Recent surveys have shown that the average college graduate has more debt than ever before, and that this increased debt makes it harder for graduates to save money and therefore more hesitant to buy homes. What’s more, millennials aren’t the only ones who carry this burden–about 43 million Americans, including millennials, Gen Xers, and even some baby boomers, are currently drowning in student debt.
However, luckily for us former students, the mortgage investor Fannie Mae has introduced three new changes that will make it much easier for individuals with student debt to purchase homes. Here are three situations in which these new rules will help.
1. If Someone Else Makes Your Student Loan Payments
Many employers now offer their employees student loan repayment benefits. In the past, this system has made it more difficult for individuals looking to buy homes; when calculating a homebuyer’s debt-to-income required for mortgages, mortgage lenders did not take into account that the potential homebuyer did not have to make their student loan payments themselves.
Fannie Mae’s recent changes, however, allow mortgage lenders to exclude a third party’s payments from a mortgage calculation. Homebuyers just need to provide documentation that their employer, their parents, or another third party have been helping with student loan payments for at least 12 months. This should make it easier for young homebuyers who enjoy repayment benefits from employers or who receive some financial assistance from their parents to buy their own homes.
2. If You Participate in an Income-Based Repayment Plan
Many people with student loans participate in this type of federal payment plan, which allows them to adjust their monthly loan payments according to their income. Previously, because these monthly payments can change from year to year, potential homebuyers on an income-driven repayment plan could not use this lower monthly payment for their debt-to-income ratio. Even if the potential homebuyer was only paying a fraction of their student loan balance each month, lenders were required to factor in 1 percent of the homebuyer’s student loan balance as their monthly student loan payment. This meant that many potential homebuyers debt-to-income ratios did allow them to qualify for a mortgage. Fannie Mae’s recent changes, however, mean that an individual’s actual monthly payments, as reported to credit bureaus, will count toward their debt-to-income calculations.
3. If You Want to Pay Student Loans With Home Equity
While a cash-out option was previously available to homeowners with home equity, Fannie Mae recently eliminated their cash-out loan delivery fees for lenders, as long as these funds go toward paying off student debt. This change will be especially helpful for parents who are co-signers for their children’s student loans, or who participate in “parent plus” programs. Keep in mind that they did not necessarily eliminate fees associated with the loan for borrowers, and that these fees will likely be passed on to the consumer.