Let’s face it, it simply costs a lot to attend college. So much so that students and parents alike turn to borrowing for part of their college costs. From basic tuition to numerous additional fees to books to housing, well, it adds up.
Today, student loan debt reaches around $1.48 trillion. That’s trillion with a “t.” The average student loan debt today is around $40,000. All total, there are 44.2 million Americans currently carrying student loans. But another impact of the growing use of student loans affects the economy in other ways. When someone is paying off student loans, that leaves less cash in the bank for other obligations.
Student loans can be in deferment, forbearance or repayment. Loans in deferment do not require a payment yet will become due and payable at an agreed upon date yet interest still accrues on the loan. Forbearance is similar to a deferment and involves reducing the amount of what you owe or canceling monthly payments altogether for up to a year. As with a deferment, interest also accrues during the 12 month period. For student loans that are in repayment, borrowers then make the monthly payments according to the note.
When an underwriter reviews a credit report and sees there are student loans listed, many times the monthly payments aren’t shown because they’re not yet due because of deferment or forbearance. Even many loans that are currently in repayment won’t show the actual monthly payment. However, lenders are still required to calculate a monthly payment based upon the information included in the credit report. So how do lenders come up with a monthly payment if there is none shown?
There were some changes that took effect on November 1 of this year pertaining to loans approved using Freddie Mac guidelines. Prior to this date, lenders would calculate monthly payments using the greater of whatever appears on the credit report, 0.5% of the original balance or 0.5% of the current loan balance. For loans that are in deferment or forbearance, lenders use the greater of the monthly payment amount listed on the report, 1.0% of the original loan balance or 1.0% of the outstanding balance.
For example, let’s say someone has a student loan currently in deferment with a student loan balance of $30,000. That would put a payment of $300. But with the new guidelines, the payment could be half that or 0.5% of the outstanding balance. The new requirements state that if there is an amount listed on the credit report to use that amount or the borrower can provide a copy of the note showing what the minimum payment is on the loan. If there is a zero balance, then the 0.5% calculation can be used.
Instead of having different guidelines for repayment, deferment and forbearance, the new guidelines apply the same requirements to all three categories.
Freddie Mac loans are loans that are underwritten to standards issued by Freddie Mac. Lenders approving a loan using these guidelines then make the approved mortgage eligible for sale in the secondary market. Doing so then frees up more capital in order to make more loans. Fannie Mae also issues guidelines for lenders to use and also buys eligible mortgages from lenders. However, as of this writing, Fannie still uses the 1.0% calculation for loans in deferment and forbearance. This may change however as Fannie and Freddie both at some point mimic one another as it relates to underwriting guidelines.
One final note. Lenders are not required to follow these guidelines but cannot make them more lenient and still be eligible for sale in the secondary market. For example, a lender may apply an “overlay” which adds an additional layer of qualifying. A lender might stick with the 1.0% calculation even though the November 1 adjustment asks for only a 0.5% payment.
When newly graduated home buyers have student loan debt, that debt must be treated just like any other debt and monthly payments on the student loan will have an impact on how much that individual can borrow. These new guidelines from Freddie Mac make home buying more affordable for those with student loan debt.
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