Don’t blame avocado toast and lattes. For most young people, the number one barrier to buying a home is from student loan debt. It’s a large part of the reason that the homeownership rate for Americans under 35 — and the rest of the population, in fact — is at the lowest level in several decades. So it’s likely no surprise that according to a recent survey, 71% of student loan borrowers stated those loans as a reason they’ve delayed buying a home. Fortunately, a new policy from Fannie Mae will make it easier.
Starting July 29, borrowers are able to have higher levels of debt and still qualify for a home loan. Fannie Mae and Freddie Mac are raising their debt-to-income ratio limit to 50 percent of pretax income from 45 percent. This change is designed specifically to help those with high levels of student debt.
Before this announcement, many with high student loan debt found that their debt-to-income (DTI) ratio was higher than 43-50 percent, which is required by most mortgage lenders. DTI refers to the ratio between your monthly credit-related expenses — including rent, mortgage payments, credit cards, student loans and the like — and your monthly gross income.
Even if a mortgage application looks great, the wrong DTI can be a deal breaker. Once the change takes effect, loan applicants who have really struggled to meet DTI requirements now have a better chance of getting a loan approved.
Thanks to this change, borrowers will also be able to reduce their student loan payments in proportion to their income. It will vary as part of the plan renewal, which can help with saving for a down payment, as well as future mortgage payment.
Another aspect of the rules will benefit borrowers whose loans are being paid back by employers or parents. Now, those payments will be excluded from the mortgage calculation, still lowering the DTI. As long as the borrower can supply documentation that a third party, such as an employer or parent, has satisfactorily made the payments for at least the last 12 months, then they will be excluded.
If you’ve been wanting to help your adult children start the home buying process, this is the best solution. And even if you don’t have student loan debt, you can take advantage of these changes and get a mortgage easier. It’s a great time to invest in your dream home.