Student Loans: The Fall Thaw
A little over three and a half years ago, the world came to an abrupt stop. Businesses shuttered, schools closed, and people were told to stay in their homes all in the name of COVID.
Many financial-related responsibilities were put on hold due to individuals being temporarily displaced by their employers and the unknown impact to their income. Individuals with mortgages and auto loans were able to request a forbearance agreement for some financial obligations and the federal government enacted a freeze on student loan payments and accruing interest.
Although the mortgage payment and auto loan obligations resumed after a few months, the hold on student loan payments and accruing interest remained frozen. Until now…
Interest began accruing on federal student loans effective September 1st with payments resuming during the month of October. The resuming of student loan payment obligations could have a significant impact on many homebuyers and their buying power.
The student loan payments that were on hold were treated as deferred student loan debt in mortgage world. When student loans are in deferment, there usually is not a monthly payment reported on credit, however that doesn’t mean a monthly payment obligation isn’t taken into consideration when analyzing a borrower’s debt-to-income ratio. The guidelines on calculating a monthly payment in this situation vary depending on the individual loan program.
With Fannie Mae (Conventional Financing), 1% of the outstanding balance is calculated as the minimum monthly payment. Freddie Mac (also Conventional) requires .5% of the outstanding balance to be considered as the minimum monthly payment. FHA and USDA Rural Housing follow the same calculation as Freddie Mac - .5% of the outstanding balance. VA loans use a few different formulas to calculate a minimum monthly payment.
Since student loan payments are resuming, it is likely that the actual monthly payment will be higher than what was considered as a minimum payment, thus impacting many homebuyers’ qualification.
Assuming a $37,000 balance in student loans which is the national average, the likely monthly payment used for debt ratio calculation over the past 3 1/3 years was $185 and the fully amortized payment beginning in October would be a little over $400 assuming a 5.5% interest rate over 10 years. That $215 increase in monthly payment is equivalent to about $30,000 in buying power meaning the buyer could potentially qualify for a purchase price $30,000 less than the prior pre-approval. With home prices remaining at high levels and interest rates not showing any sign of retraction, this could easily cause a delay in homeownership goals to many buyers.
From an industry perspective, agents as well as loan officers should make sure that buyer’s mortgage pre-approvals are up to date with these new changes. Most lenders obtain a “soft pull” credit report within a week or two of closing and if an unexpected increase in monthly obligations occurs, it could easily derail an entire deal.
Potential homebuyers who have student loan debt should take action immediately to obtain information from their current student loan servicers to understand what their monthly payment obligations are moving forward. In some cases, there may be an opportunity to request an income-based repayment schedule which may reduce the minimum monthly payment and help lighten the load of payment shock and help with mortgage qualification.
Dan Ranck
Mortgage Loan Officer
NMLS #140989
HomeSale Mortgage, LLC
NMLS #1054689
Direct : 717.271.2400 | efax : 866.849.4320
dan.ranck@homesalemortgage.com | www.danranck.com
Facts, opinions and information expressed in the Blog represent the work of the author and are believed to be accurate, but are not guaranteed. The Lancaster County Association of Realtors is not liable for any potential errors, omissions or outdated information. If errors are noted within a post, please notify the Association. Posts represent the author's opinion and are not necessarily the opinion of the Association.
