It's Now Easier to Get a Home Loan Even If You Have Student Loan Debt — Should You?

By Carrie Kirby on 31 July 2017 0 comments

Student loan debt has snowballed to the point where many young people are delaying the purchase of a home. On one hand, it's hard to save up for a down payment when you're already $37,172 in debt — the average for class of 2016 graduates. On the other hand, student loan debt can make it hard to qualify for a mortgage at all.

Fannie Mae, the nation's largest purchaser and guarantor of mortgages, recently addressed the second problem by changing two key rules for borrowers. Because Fannie Mae buys mortgages from about 1,800 lenders that follow its rules, these changes at Fannie Mae affect potential home loan borrowers all over the country.

Debt that someone else is paying off no longer counts against you

For example, your parents or your employer might be making your student loan payments. In the past, a lender would still count those payments as part of your debt-to-income ratio, a key figure used to determine whether you can afford to make mortgage payments. But now, Fannie Mae will recognize that if you're not the one paying the bill, that loan won't actually affect your ability to pay your mortgage.

This new rule will also apply to other kinds of debt that someone else is paying for you, such as car loans or credit card balances. To qualify, you'll need to provide documentation showing that someone else has made payments on the debt for the past 12 months.

Flexible payment plans are recognized

One of the benefits of carrying a federal student loan is that you may qualify for an income-based repayment program, lowering your monthly obligation to a certain percent of your available income. This is great — until you apply for a mortgage and find out that Fannie Mae uses the standard payment amount, not the lower amount you're actually paying, to determine your debt-to-income ratio.

From now on, lenders working with Fannie Mae can instead use the lower, flexible payment amount — meaning that more applicants with student debt will qualify to buy a home.

With these two changes, many more young people will qualify to buy homes — a change that is probably good for the economy and the housing market. But is it a good idea for you? Some questions for graduates who will be affected by the Fannie Mae decisions — and for other student loan borrowers — to ask.

What would you do if you had to take over your own student debt payments?

For people who have their loans paid by employers or others, investing in a nice house may seem like a no brainer. Say you're a young doctor practicing at a hospital that covers student loan payments as part of its compensation package. Great! You are able to buy a four-bedroom home with a swimming pool.

But then the hospital files for bankruptcy and you are let go. You can get another local position with a private practice, but it won't pay for your student loans. Will you be able to pay your new mortgage and student loans at the same time?

What if the government changes student debt repayment rules?

If your income is already so limited that you qualify for a modified loan repayment plan, it's worth pondering whether buying a home is the right move at this stage in your life. Congress could decide to end that program in order to save money. Think about if and how you could make a standard debt payment and a mortgage payment if the rules change.

Do you have enough saved for a down payment?

It used to be that buyers routinely plunked down 20 percent of a home's value upfront. Nowadays, most buyers make down payments of between 5 percent and 10 percent. If you've been making large student loan payments, you may not have this money saved up. (See also: 4 Easy Ways to Start Saving for a House Down Payment)

Will you be able to afford maintenance?

When working out your hypothetical budget as a homeowner, don't stop after accounting for your student loan payments and the mortgage. You need to set aside money for things that break and systems that wear out, from the doorbell to the roof. You never know when something is going to need replacing, but a rule of thumb is to budget 1 percent of a home's value for maintenance each year. So if you plan to buy a $200,000 home, make sure you can afford to set aside $2,000 annually for repairs.

How will you handle a financial emergency?

A financial emergency can be bad enough if you're renting and are forced to break your lease and move somewhere cheaper. But once you're committed to owning a home, a loss of income could mean losing the home as well. And homeowners with hefty student loan debt are that much more vulnerable.

Before you sign that purchase contract, it's a good idea to have several months of mortgage payments in an emergency fund. If you don't have an emergency fund, at least have a plan for how you would pay the mortgage if you lose your job. Could you turn to a relative for support? Could you advertise for roommates? Sell your car?

Taken altogether, it's clear that there is no one-size-fits-all answer to whether you should buy a house before your student loans are paid off. Homeownership comes with a lot of benefits, such as the mortgage interest tax deduction, so it may not be something you want to put off for the years it could take to pay off the student loans.

But rushing into homeownership before you have a stable income and emergency reserves would be a mistake for anyone — and that much more so for folks with heavy student debt.

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It's Now Easier to Get a Home Loan Even If You Have Student Loan Debt — Should You?

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