Student Loan Debt, Income-based repayment plans, and Home Mortgages Denied due to Student Loan Debt.
In the past if you were trying to get a home mortgage and you have college student loan debt home mortgage lenders were required to use the 1% rule; which means that if you have $50,000 in student loans they are required to count $500.00 per month against your debt to income regardless if you have an income-based repayment plan that is much less.
This 1% rule is used against you regardless if you have an income-based repayment plan which could be either $0 per month or much less than the 1%; therefore many people especially school teachers were typically denied for home loans due to the high debt to income limits. Fortunately, Fannie Mae, who is the largest purchaser or Conventional loans has updated the rules; see below copy and paste from Fannie Mae guidelines.
Here is the full link: https://www.fanniemae.com/content/announcement/sel1704.pdf
Fannie Mae guideline update April 25, 2017
Student Loan Payment Calculation We are simplifying the options available to calculate the monthly payment amount for student loans. The resulting policy will be easier for lenders to apply, and may result in a lower qualifying payment for borrowers with student loans.
If a payment amount is provided on the credit report, that amount can be used for qualifying purposes. If the credit report does not identify a payment amount (or reflects $0), the lender can use either 1% of the outstanding student loan balance, or a calculated payment that will fully amortize the loan based on the documented loan repayment terms.
What this means in layman’s terms is that what I mentioned before, if you have been declined for a home mortgage loan in the past because your debt to income was too high due to your projected student loan payment at 1% of the loan balance regardless to the income-based payment that is either $0 or very much lower than you can now use the lower payment and get approved!! All you need to do is show proof of your income-based repayment plan and the lenders use that number/
Now FHA home loans, VA home loans, and Rural Development loans still require the lender to use the 1% rule, only Conventional Fannie Mae home loans follow the rule that what is reported on your credit report can be used. The good news is that Conventional Fannie Mae guidelines have recently relaxed their down payment rules and only require 3 % down if you are a first time home buyer or have at least one person on the loan application that is a first time home buyer within the last 3 years.
If you are not a first time home buyer you can also qualify for the 3% down if you are within the income limits for the Fannie Mae Homepath program; here is the link to find out if you qualify https://www.homepath.com/state/mi.
Conventional loans have historically been thought of as 20% down loans; this is no longer the case. You can get a Conventional loan at as little down payment as 3%, and the mortgage insurance is typically less than the go-to FHA loan which requires .85% mortgage insurance that by the way, you can currently never get rid of unless you refinance; Conventional loans allow you to drop the mortgage insurance when you have 20% equity in your home without refinancing!!
Home mortgage interest rates still are very comparable vs Conventional, FHA, VA, and Rural Development home loans but with Conventional home loans again you can get rid of PMI or mortgage insurance without refinancing vs other home loans, and again only 3% down if you qualify.
If you have been un-approved/denied for a home mortgage due to your college student loans give me a call at 810-223-2122 and I will give you a personalized consultation; no need to call an operator or front desk person, this is my direct number.