Want to know the No. 1 reason I see millennial clients struggle to buy their first home?
Two words: student loans.
Yes, that’s trillion with a “t.”
Here in Hampton Roads, I often help first-time homebuyers reach the closing table despite their onerous student loan debts. Fortunately, there’s good news on the way in 2018.
Freddie Mac recently announced a change in the way it handles student loans and debt-to-income calculation.
When homebuying clients have income-based repayment plans and have started making monthly payments, lenders can now qualify them on the basis of the amount reported on their credit report or 0.5 percent of the greater of the outstanding balance or the original loan amount. Before the change, lenders would use 1 percent. The change will impact about 5 million Americans who participate in reduced- repayment plans.
Income-based repayment is designed to help people with high student loan debt who have limited discretionary income. It’s a popular option, given how many people carry student loan debt today.
What does the change to .5 percent mean? It’s one more way the lending regulations have loosened to help more people qualify to buy a home.
Let’s say John has $50,000 of student loan debt. With the new rule, the lender will only count .5 percent ($250) of student loans toward John’s monthly obligations. Before the rule change, the lender needed to use 1 percent of the student loan balance ($500).
The $250 savings can make a big difference in the loan amount John can receive. That’s because he shows the bank he is less extended on his bills.
As a side note, if parents are paying the debt instead, the lender may exclude the monthly payment from the borrower’s recurring monthly obligations. The lender needs to see that parents have made regular payments for the past 12 months.
The change to income- based repayment speaks to a broad trend in the housing market. Without help on student loans, too many millennials would remain shut out of the homebuying process and have no path forward.
That’s why Freddie Mac, in my view, has become creative in its solutions. On paper, the change is only half of a percentage point. But the impact will be felt by first-time homebuyers nationwide as they push for homes to call their own in 2018 and beyond.
Featured photo: Pictures of Money (Flickr)