The new Saving on a Valuable Education (SAVE) student loan repayment plan may help student loan borrowers qualify for a mortgage easier.
SAVE is an income driven repayment plan that sets the monthly student loan payment as a percentage of discretionary income.
The monthly payments for undergraduate student loans on the SAVE plan drop to 5% of borrower’s discretionary income (down from 10%) beginning in July of 2024. Meanwhile, borrowers who have both undergraduate and graduate school loans will pay a “weighted average” of rates between 5% and 10% of their discretionary income.
Biden’s SAVE plan also increases the income exemption for those who qualify for $0 monthly payments from 150% of the federal poverty limit to 225%. Ultimately, this means more people with higher incomes may pay $0 toward their student loans each month.
For reference, earning 225% of the federal poverty limit in most of the country means you bring home $32,000. With that size income for a single person with no dependents, their monthly student loan payment would be $0 on the SAVE plan. The same applies for a family of four with household income of $67,500 per year, according to StudentAid.gov.
How The SAVE Plan Helps With Homeownership
For borrowers who are tired of renting, these benefits could mean the difference between becoming a homeowner or sitting on the sidelines. This is because lower monthly student loan payments help borrowers lower their debt-to-income (DTI) ratio — a factor lenders use to determine how much consumers can afford to borrow in a home loan.
This potential benefit of the SAVE plan was recently highlighted in a joint report from the Center for Responsible Lending (CRL) and California Policy Lab (CPL). The Unveiling the Potential of Saving on a Valuable Education (SAVE) report shares several important findings, including an estimate that the SAVE plan could reduce average monthly student loans payments to $69 from the $197 currently paid. Based on these lower payments, the average borrower paying back their student loans could see their debt-to-income (DTI) drop by 1.5% to 3.6% by enrolling in SAVE.
Borrowers who enroll in the SAVE plan and secure a lower monthly payment on their student loans can look more attractive on paper to mortgage lenders. A lower DTI can free up cash they can use for mortgage payments, help them borrow a larger amount upfront, or both. On top of that, having a lower student loan payment makes it easier to save up the down payment for a home in the first place.
Of course, becoming a homeowner hinges on additional factors as well, including a borrower’s employment history and credit score.
$0 Monthly Payments May Pose A Problem
Unfortunately, there’s a issue to watch out for if you’re hoping to become a homeowner after locking in a $0 monthly student loan payment with the SAVE plan. Several types of home loans use 0.5% of the outstanding loan balance when calculating DTI, even if the true monthly payment is $0. This includes Federal Housing Administration (FHA) loans, which are popular for first-time homebuyers due to their low credit score and down payment requirements.
It’s easy to see how this calculation could be a problem for low-income borrowers who qualify for $0 monthly payments, particularly if they have a large student loan balance.
Interestingly, Fannie Mae
Fannie Mae
According to the CRL study, “If the Federal Housing Administration (FHA) adopts underwriting criteria similar to Fannie Mae by counting $0 payments, borrowers with $0 payments could see their DTI decrease by between 3.8% to 7.1%.”
Unfortunately, consumers can’t really help if they qualify for a $0 monthly payment on the SAVE plan, short of earning more money. But when it comes to shopping for a home loan, understanding the different lending criteria can give you a leg up in knowing what you’ll qualify for.
Bottom Line
The SAVE income-driven repayment plan has a lot going for it whether you want to own a home or not, particularly if you are trying to pay as little as possible toward student debt then have remaining balance forgiven. That said, qualifying for a lower monthly student loan payment can have a positive impact on your DTI, boosting your chances at homeownership.
Unfortunately, buying a home will still likely require a sizeble income and downpayment. If you are already on that path, looking at the SAVE repayment plan could be positive decision.
“Borrowers with non-zero monthly payments who have DTIs between 40% and 65% will see their DTI drop between 1.5% and 3.6% by enrolling in SAVE,” according to the study. “However, for the benefits of SAVE to be fully realized, underwriting criteria for federally insured mortgages must reflect actual payments, even if that payment is $0.”
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