Many college-educated millennials expect to delay homeownership for seven years because of their often-sizeable student debt,a Sept.18 study by the National Association of Realtors (NAR) and American Student Assistance (ASA) shows.
The study found that only 20 percent of those millennials surveyed currently own a home. Of the remainder, 83 percent believe their student loan debt has affected their ability to buy, and 84 percent expect to postpone home ownership by at least three years.
But look again, millennials. The pendulum could be swinging in your favor.
New guidelines announced by Fannie Mae, a government-sponsored company that provides finance for almost one-third of the mortgage market, could help ease the path to homeownership for potential and current homebuyers with student loan debt.
Here’s a summary of the updated selling guidelines announced by Fannie Mae in April, which could change the landscape for wanna-be homeowners with student loans, as well as those who already own a home:
1. Fannie Mae changed the way monthly payment amounts are calculated, making it easier for borrowers to apply for mortgage loans and possibly leading to a lower qualifying payment for borrowers with student loan debt. Previously, if a student loan was in deferral, lenders treated borrowers as though they owed a monthly payment of 2 percent of the outstanding loan balance. Now, a lender can use 1 percent instead.
While a drop from 2 percent to 1 percent may sound insignificant, here’s some quick math: the average debt per student for 2016 was $37,173. With the previous 2 percent calculation, the average amount deferred would have been $743. Under the new 1 percent guideline, that amount drops to $371, meaning a lender could now approve the borrower for monthly payments that are $371 higher. That alone could make a difference for millennials and their home ownership dreams.
2. Fannie Mae changed the debt-to-income ratio requirements for non-mortgage debts, including student loans. If the borrower can supply the lender with documentation stating that a student-loan debt has been satisfactorily paid by another party for the past 12 months, the debt can be excluded from the debt-to-income ratio.
3. A third change outlined in Fannie Mae’s updated selling guidelines applies to the 20 percent of millennials who are already homeowners. A new “student loan cash-out refinance feature” allows homeowners to use existing home equity to pay off student loan debt through a refinance transaction, potentially reducing their monthly debt payments.
These new rules could turn millennials’ home ownership dreams into reality. But, as mom always said, make good choices. While these changes can make dreams more attainable, carefully consider all debts, as well as home maintenance costs, overhead and other obligations when considering any major purchase.