How Could the Forgiveness of Student Loans Affect Homeownership?
Buying a home is like many dreams, it requires planning, foresight, and hard work. Owning a home is one of the few dreams that requires you to qualify for a mortgage though. Qualifying for a home loan often hinges on two key factors: the borrower’s debt-to-income ratio (DTI) and their credit score.
What’s that have to do with student loans? A lot. Approximately 13.5% or 45 million Americans owe student loan debt. This debt can affect both their DTI as well as their credit score, making it more challenging for them to qualify for a mortgage.
However, student loan forgiveness and discharge programs do exist. In fact, they may be able to help some homebuyers qualify a mortgage, especially younger generations who have faced different realities on the path to owning a home than Baby Boomers and Generation X. The most recent plans announced by the Biden Administration provide targeted student debt relief to 43 million borrowers.
What is student loan forgiveness?
Forgiveness of a student loan means there is a chance you may not have to repay some or all of your loan. Student loan forgiveness is different from student loan discharge. Student loan discharge occurs when you no longer have to pay your student loans because of specific circumstances. Scenarios can include if the borrower becomes disabled, the school to which the loan is owed closes, or, in some cases, bankruptcy.
Student loan forgiveness can sometimes be offered based on the line of work the borrower has chosen. For instance, teacher loan forgiveness may be available for those who have worked for a certain number of years in low-income schools. The eligibility requirements of each program are different, but the borrower's income and how consistently they've been repaying their debt is often taken into consideration.
How does the new student loan forgiveness program work?
The Biden Administration’s student loan forgiveness program works differently than other loan forgiveness programs. The executive order President Joe Biden signed will cancel $10,000 in debt for federal borrowers who meet the income requirements. For eligible borrowers who received a Pell Grant, that amount doubles to $20,000. This relief is available for direct loans from the federal government.
How could the new student loan forgiveness program affect your mortgage?
Mortgage lenders use many factors to decide whether or not a borrower can qualify for a home loan. Two of the most common that are taken into consideration are your DTI and your credit score. These are also used to determine the loan types and amount available to the individual borrower.
Debt-to-income ratio: Your debt-to-income ratio, or DTI, is the ratio of the amount you pay to debt every month vs. the amount of monthly income you bring in. These debts can include credit card payments, personal loan payments, and student loan payments.
Mortgage lenders determine your DTI by adding your current debts to your predicted monthly mortgage payments and dividing it by your monthly income. The percentage of DTI accepted by a mortgage lender varies according to the lender’s individual requirements and the type of loan the borrower is applying for. However, it is generally preferable for a borrower’s DTI to be between 36% and 50%.
Some lenders will go as high as 57% for certain loans.
The less outstanding debt a borrower has, the lower the DTI will be. Partial or full student loan cancellation could allow you to qualify for a loan type or amount that might not have been available previously.
Credit Score: Your credit score is determined using a set of factors that have both dependencies on your situation and complexities with each other. A change in each factor may raise or lower your credit score.
- Types of credit lines: This includes mortgages, credit cards, and loans.
- Your credit history: This is the combination of the different ages of your credit lines.
- Recent credit lines: This considers how recently you opened a new line of credit.
- How much you owe: This includes the amount of credit currently available to you.
- Your payment history: This considers how much you’ve paid on your credit lines and whether you’ve paid them on time.
Your credit score can range from 300 to 850.
- 300 to 579 is considered poor credit.
- 580 to 669 is considered fair.
- 670 to 739 is considered good credit.
- 740 to 799 is considered very good.
- 800 to 850 is considered excellent credit.
The credit score that mortgage lenders are looking for depends on the type of home loan the borrower is trying to get. They usually range from as low as 500 for FHA loans to a minimum requirement of 620 for a Conventional loan. The higher your credit score, the easier it is to qualify for a loan.
Your credit score also factors into the terms of your loan agreement. This means it can affect the amount of the loan itself, the payback conditions, and the cost of private mortgage insurance. The higher your credit score, the more lenient the terms and conditions of your loan may be.
How student loan debt forgiveness will affect your credit score will depend on your individual circumstances. If you have been making payments on your loan and are eligible for forgiveness on the full amount of your loan, your credit score may increase. Even a slight increase in your credit score may improve the chances of you qualifying for mortgage.
When will you know? In general, credit scores are updated every one to two months. This means that you are likely to know how student loan forgiveness affects your credit statement under three months after part or all of it is forgiven.
To get answers to your questions or more information about how to qualify for a mortgage, contact one of the loan officers at New American Funding. They will be happy to assist you in figuring out which home loan is right for your needs.
What are the benefits of the Biden Administration’s student loan forgiveness program?
According to the White House, the student loan forgiveness program is expected to have specific benefits.
- Relieve some or all student loan debt for up to 43 million borrowers: Around 20 million borrowers are eligible to have their student loans forgiven in full.
- Provide debt relief for low-and middle-income borrowers: According to estimates from the Department of Education, for borrowers who are out of school, around 90% of relief will go to individuals who are earning less than $75,000 per year. The maximum annual salary eligible for debt relief is $125,000 for an individual and $250,000 for a household.
- Provide debt relief for borrowers of all ages: Eligible borrowers are estimated to include ages from 25 years and under to senior citizens.
- Help narrow the racial wealth gap: Those borrowers who received Pell Grants and meet the income requirements will receive up to $20,000 in loan relief. According to the White House, Black borrowers are “twice as likely to have received Pell Grants compared to their white peers. Other borrowers of color are also more likely than their peers to receive Pell Grants.” Offering debt relief targeted to recipients of Pell Grants is expected to advance racial equity.
What are the requirements of the Biden Administration’s student loan forgiveness program?
The Biden Administration’s student loan forgiveness program is not available to all borrowers with student loan debt. It is designed to provide relief to individuals and families under specific circumstances.
- The debt must be federal. Private student loans are ineligible.
- The maximum annual income for an individual is limited to $125,000 and $250,000 for a household
- The borrower must have received a Pell Grant and meet the income requirements to receive $20,000 in debt forgiveness.
- You must apply.
Your individual circumstances will determine your eligibility. The student loan forgiveness program is a recent announcement, and more details will be available at a later date.
For more information about mortgage options available to you, contact our team today.
How does student loan forgiveness work?
There are several different types of student loan debt forgiveness and discharge available for federal student loans. Each one works a little differently and has its own set of qualifications and requirements. In order to find out if you are eligible for student loan forgiveness, talk to your loan servicer to see if you qualify. They can answer your questions and walk you through the application process.
Are current college students eligible for student loan forgiveness?
Yes, students currently enrolled are eligible for debt relief if they meet the income requirements. For students who are still listed as dependents on their parents’ tax returns, their parents’ income must meet the debt forgiveness requirements.
Do I have to apply for the debt forgiveness program?
Yes. The U.S. Department of Education will need your income data to know if you qualify for student loan forgiveness. You will need to fill out and submit an application with that information. Applications will be available in October.