The rules regarding treatment of student-loan debt in calculating loan-to-debt ratios have undergone significant changes. These rule changes, implemented by mortgage investor, Fannie Mae, will have the effect of easing the scrutiny of new home buyers’ creditworthiness.
Of the rule changes, here are two that could benefit you, if you have student loan debt:
- If you participate in a reduced payment plan to pay your student loan debt, then your actual monthly payments, as reported to the credit bureaus, will count toward your income-to-debt ratio calculation. For example, if your original monthly payment was $500 a month, but it has been reduced to $100 through an “income-based repayment” plan, then only the $100 will be added to your monthly debts to calculate your income-to-debt ratio. Under previous rules, lenders were required to use a factor of 1% of your student loan balance as your monthly payment, even though you were only paying a fraction of that amount. As a result, many borrower’s income-to-debt ratios were pushed beyond most mortgage lender’s underwriting limits. This prohibited many potential new home buyers from purchasing their first home. By using the actual monthly payment of student loan debt, many more first-time home buyers will qualify for a mortgage.
- If you have nonmortgage debts that are being paid by someone else – for example, let’s say your parents pay your monthly credit card balances – these nonmortgage debts no longer will be included in your income-to-debt ratio calculation, provided that the payments have been made steadily for 12 months or more by someone other than you. This rule change should improve the debt ratios of young buyers who are getting a little help on their cash flows from their parents.
Zwick Law’s Real Estate Settlement Division is directed by Carl A. Lias, a Pennsylvania Licensed Title Insurance Agent since 1999, who has over 18 years of experience in residential and commercial real estate transactions, including refinance transactions, as well as extensive knowledge of conventional, FHA, VA, USDA and PHFA mortgage loan products. Zwick Law is dedicated to providing clients in DuBois, Treasure Lake, Brookville, and surrounding areas across Western Pennsylvania with experienced, fast, professional and friendly real estate settlement services, at a cost that is typically more affordable than non-lawyer, real estate title companies.
Contact Zwick Law’s office to discuss your residential or commercial real estate matters. To schedule an appointment, contact the Real Estate Settlement Division at (814) 371-6400, by e-mail at firstname.lastname@example.org, or via our Contact Page.