According to Forbes.com, there is 1.3 trillion dollars of student loan debt in the United States. Student loan debt is the second highest consumer debt category (mortgage debt is the first) and is higher than both credit cards and auto loans. The Forbes article indicates that the average student in the class of 2016 has $37,172 in student loan debt.
Fannie Mae, recognizing how this student loan burden impacts so many individuals, has recently made several changes to their policy on student debt, paving the way to make it easier for those borrowers to obtain a home loan. On April 25, 2017, Fannie Mae published Selling Guide Announcement SEL-2017-04, which provided several new Student Loan Solutions. We are going to discuss the changes made to student loan payment calculation and debts paid by others.
STUDENT LOAN PAYMENT CALCULATION
In what is being seen as a significant improvement for borrowers, Fannie Mae now allows use of the current payment on the credit report for qualifying. This means that for borrowers in an Income Driven Repayment (IDR) or Income Based Repayment (IBR) plan the actual payment is acceptable for qualifying purpose, even if that payment is $0. The update from Fannie Mae states:
If a payment amount is provided on the credit report, that amount can be used for qualifying purposes. If the credit report does not identify a payment amount (or reflects $0), the lender can use either 1% of the outstanding student loan balance, or a calculated payment that will fully amortize the loan based on the documented loan repayment terms.
However, Fannie Mae further clarified in their FAQ that: As long as the lender can provide documentation showing the IDR payment is $0, they can qualify the borrower with $0 for the monthly qualifying payment. The thought is that since the payment is based on the borrower’s income, as their payment goes up, so will their income and their ability to handle the additional debt.
If the credit report doesn’t correctly reflect the monthly payment, Fannie Mae will allow student loan documentation in the file (i.e., most recent student loan statement), evidencing a different monthly payment than the credit report as alternative documentation to support the correct monthly payment amount. Also, a credit report supplement or update to the credit report to reflect the correct monthly payment amount is acceptable to document the monthly payment.
It is important to note that this does not change the requirement for student loans in deferment or forbearance. Fannie Mae indicated in their FAQ that payments in deferment or forbearance may not be excluded for qualifying. If the student loan is in deferment or forbearance and the credit report payment amount is missing (or $0), lenders must calculate a qualifying payment by either using 1% of the outstanding student loan balance or a fully amortizing payment using the documented loan repayment terms.
DEBTS PAID BY OTHERS
Another significant improvement announced in this seller update was regarding debts paid by others. With it, for non-mortgage debt, if the borrower can prove someone else has been making the payment on the debt for the previous 12 months, it does not need to be included in the qualifying ratio. The actual update from Fannie Mae states:
If the lender obtains documentation that a non-mortgage debt has been satisfactorily paid by another party for the past 12 months, then the debt can be excluded from the debt-to-income ratio. This policy applies regardless of whether the other party is obligated on the debt. NOTE: This policy does not apply if the other party is an interested party to the subject transaction (such as the seller or realtor).
So, for instance if a parent took out loans for their child’s education and the child is now paying that debt, or the student took out the loan but the parent has been making the payment for the child, as long as it is documented with the most recent 12 months’ cancelled checks (or bank statements evidencing 12 months’ payments) showing the other party is making the payment, we can exclude that monthly payment in the ratios.
When using this option there also has to be evidence that there is no history of delinquent payments for that debt paid by others. If there were delinquencies, then the payment would have to be included in the borrower’s ratios. Additionally, Fannie Mae has indicated the other party has to pay the complete monthly obligation every month for a minimum of 12 months - the other party can’t be making a portion of the payment and have that part excluded. It is all or nothing in regard to debt paid by others.
Although this policy for debts paid by others will benefit borrowers with student debt, it is not limited to student debt. It includes all non-mortgage debts including installment, revolving, lease payments (including auto leases), alimony, child support, and separate maintenance.
For mortgage debt paid by others, Fannie Mae has not changed their policy, and in the published FAQ indicated: Our policy regarding mortgage debt has not changed. We will continue permitting exclusion of the mortgage monthly payment from a borrower’s DTI ratio when the lender can provide a 12-month history of satisfactory payment by another party, but only if the other party is obligated on the mortgage debt.
PRMG is pleased to have already aligned with Fannie Mae on these changes and allow borrowers who have been weighed down with student loans to ease the burden it has placed on them and help achieve the dream of homeownership with these new policies in regards to qualifying.