Student loan debt is up 302% since 2004, because of the rising costs of getting a degree, according to ValuePenguin. The average student loan debt is $32,731, according to the most recent available data. The median debt isn’t as bad, at $17,000, but it’s still enough that some young people have delayed getting a place of their own.
Freddie Mac, one of the major backers of U.S. mortgages, has changed its guidelines to make it easier to qualify for a mortgage if you have student loan debt.
We’ll get into what changed and why it could make a significant difference below, but know that if student loan debt has kept you from qualifying for a mortgage, it may be time to try again.
Let’s dig into what changed.
First, a student loan statement can now be used to prove that the monthly payment is lower than what’s reporting on your credit as long as the payment showing on your credit report is more than $0. This is a win, because Quicken Loans when we calculate your debt-to-income ratio (DTI) as opposed to basing it on paying off a certain percentage of the loan amount every month which could make your monthly payment higher for qualification purposes.
DTI is a ratio comparing your monthly debt payments –for installment debt like your car or home and for revolving debt like credit cards – to your monthly income. It’s expressed as a percentage. The lower this number is going into the mortgage process, the more you can afford to spend on your home.
If your payment is reporting as $0 on your credit report, mortgage investors assume you’ll be paying off a certain percentage of your loan balance every month. Under the old guidelines, Freddie Mac assumed that 1% of your student loan would have to be repaid every month. That payment percentage has now been lowered to 0.5% of the outstanding balance shown on your credit report.
Finally, Freddie Mac has simplified its guidance. This means these guidelines apply across the board. Whether you’re currently repaying the loan, or the loan is in deferment or forbearance, these are the requirements Freddie follows in determining a client’s ability to qualify for a mortgage.
Original article by Quicken Loans 12/2018
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