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Millennials with Student Loans: Fannie Mae’s New Policy Changes Will Help You

Beginning July 29, 2017, Fannie Mae will begin to accept borrowers with debt-to-income ratios (DTI) as high as 50 percent, up from the current 45 percent policy.  This change, in conjunction with their recent updates to the Student Loan Guidelines Selling Guide which offered lenders an easier approach to calculating DTI for those carrying student loans, will help Millennials enter the housing market. Click here to read our recent article on the student loan selling guide update.

It is becoming more apparent that student loan debt is preventing potential homebuyers from buying or selling homes because it increases their DTI ratio and makes it difficult for them to obtain a mortgage at a decent rate.

“In the mortgage arena, the lower your DTI ratio, the better. The federal “qualified mortgage” rule sets the safe maximum at 43 percent, though Fannie Mae, Freddie Mac and the Federal Housing Administration all have exemptions allowing them to buy or insure loans with higher ratios.” –Washington Post

A high DTI suggests that a person has a higher risk of defaulting on a mortgage.  But that’s not really the truth.  The majority of Americans carrying school debt pay their loans on time every month and have good credit, therefore diminishing their risk of late or missed mortgage payments.  These factors are what incited the National Association of Realtors® to urge the Federal Housing Finance Agency to reexamine their criteria and allow those with high DTI and good credit to obtain mortgages without the high fees.  Between 2009 and 2014, the GSEs (Fannie Mae and Freddie Mac) raised their fees by 164%.

“Average Americans continue to be priced out of loan products offered by Fannie Mae and Freddie Mac, leaving them with only one affordable choice, a loan from the Federal Housing Administration (FHA). FHA loans are an important option, but in a healthy market they should not be the primary source of safe, affordable mortgage financing.”  –William E Brown, President of NAR in a letter to the Director of the Federal Housing Finance Agency

Brown went on in his letter to explain that by carrying on those fees with the DTI rules as they were while at the same time subsidizing investors worth billions, Fannie Mae and Freddie Mac were undermining their own public mission.  “Rather than focusing on allowing well-qualified Americans to build wealth through affordable mortgages options, Fannie Mae is actively financing large institutions to compete with them.”  In turn, the trend has been that these investors are building high priced rental units thereby diminishing inventory and making homeownership virtually unattainable for the average American in this climate.

This policy update will make it easier to obtain financing backed by Fannie Mae if a mortgage candidate has student loan debt with a debt-to-income ratio of up to 50 percent, but pays their loans on time and has a sound credit history.  Obtaining Fannie Mae mortgages is beneficial to homebuyers because once they reach 20% equity in the home they purchase, the can cancel their mortgage insurance payments, while with FHA loans, mortgage insurance is integrated through the life of the loan.

If you’re interested in learning more about buying or selling your home in today’s current market, contact us today for a free no-obligation consultation.