Home buyers in Washington State who carry student loan debt could have an easier time qualifying for a mortgage loan, thanks to a new provision announced this month by Fannie Mae. Debts paid by a third party, such as a parent or other family member, could be excluded from the home buyer’s debt-to-income ratio.
How Student Loan Debt Affects Mortgage Borrowers
Debt plays a big part in the mortgage underwriting and approval process. Washington State home buyers with too much debt (from student loans, auto loans, and/or credit cards) could have a harder time qualifying for a home loan.
Mortgage lenders usually evaluate borrower debt-to-income ratios to ensure they aren’t taking on too much debt, with the addition of the home loan. It’s a sensible measure that protects borrowers and lenders alike.
As a result of this screening process, Washington State home buyers with student loan debt can face additional hurdles during the mortgage application process. Student loan debt by itself is not necessarily a bad thing. In fact, a history of timely payments could actually boost your credit score, making it easier to qualify for a mortgage.
Problems can arise, however, when there’s too much debt relative to the borrower’s income. For example, people with student loans and other recurring debts that use up more than half of their monthly income might have a harder time qualifying for a home loan.
And that’s where the new Fannie Mae provision comes into the picture. Under this new rule, some Washington State home buyers with student loan debt could have an easier time qualifying for a mortgage loan, particularly if they can show that some of their debts have been paid by someone else.
New Rule Could Benefit Washington State Home Buyers
Fannie Mae is one of the two government-controlled corporations that buy and sell bundled home loans in what’s known as the secondary mortgage market. (Freddie Mac is the other.) Fannie and Freddie have specific guidelines for the loans they are able to purchase from mortgage lenders. These guidelines can affect borrowers in the primary market, including home buyers.
On April 25, 2017, Fannie Mae announced that it would broaden its guidelines for mortgage applicants who have debt from student loans, auto loans, and credit cards.
According to a related news release, this change “widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else.”
“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage,” said Jonathan Lawless, a vice president at Fannie Mae. “These new policies provide flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”
The key takeaway here is that aspiring home buyers in Washington State who have student loan debt shouldn’t assume they’re unqualified for a mortgage loan. New products and programs coming onto the market are making it easier for such borrowers to obtain mortgage financing.