
Of the millions of Americans that have student loan debt, many of them pay off their education using an “income-driven repayment” plan, which allows borrowers to pay a reduced amount for their student loans each month based on their income and family size. While this may help borrowers ease the stress of their payments, it could be hindering them from getting approved for mortgages, and lenders often calculate the monthly payment based on the total loan amount, not on the reduced payment plan, leading them to conclude that the borrower is in too much debt to be approved.
In April 2017, the federally-controlled mortgage giants Fannie Mae and Freddie Mac, after heeding calls to change how they assess potential borrowers who use income-driven repayment plans, changed their rules, allowing borrowers to use their actual monthly payments for student loans as opposed to an arbitrarily calculated payment. That meant borrowers enrolled in income-driven repayment plans would potentially have lower debt-to-income ratios, and could qualify for better mortgages.
But those two companies are only part of the home-loan market. The Federal Housing Administration, a branch of the Department of Housing and Urban Development, which oversees FHA loans—government-backed loans intended for low-income borrowers—has not followed suit. (Critics of Fannie Mae and Freddie Mac argue that their baselines of credit score and down payment are still prohibitive for many potential home buyers, even if they were able to make monthly payments.) As a result, low-income borrowers in search of even the most modest home loans might be left wanting.
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