As a Certified Financial Planner™ professional, I help my clients achieve their financial goals. Two common goals are paying down debt and saving for a home. One premise is high interest rate debt should be reduced first, as any reduction in interest expense is a first step toward savings. If student loans are also a factor, those can last many years. How does one juggle student loan debt and saving for a home down-payment?
With a thorough evaluation of your income and expenses, you can uncover ways to reduce spending and increase savings. Sometimes, additional employment may be necessary to meet a specific goal. One thing is certain: plans for increasing savings take a good amount of perseverance and determination.
To facilitate access to mortgages, there are governmental programs to assist borrowers by providing access to loans with attractive rates. One such program is offered through the Federal National Mortgage Association (FNMA or Fannie Mae). The limit for a conventional Fannie Mae single family home loan in 2017 is $424,000 for most areas, and $636,150 for high-cost areas including Hawaii and Alaska. Note: there are several counties which also qualify as high-cost, such as Los Angeles and Orange County. The Federal Housing Finance Agency (FHFA) sets these limits (to see a spreadsheet by state and by county, click here.) As outlined in two recent newspaper articles, Fannie Mae has introduced policy changes, all aimed at those with student debt.
- If your student loan is on an income-based payment plan, now only that payment amount is reported to credit bureaus. This helps to lower your debt-to-income ratio and improves your credit rating too. Previously, when calculating your debt ratio, lenders used a standard 1% of your student loan balance as your monthly payment, even if your actual payment was lower.
- Fannie Mae has reduced the cost of cash-out refinancing as long as the extra cash is used to pay down student debt. If your home mortgage is below the Fannie Mae limit, there may be cash to satisfy some student loan debt.
- If you have non-mortgage debts that are paid for by someone else, those payments will not be counted in your debt-to-income ratio. For example, if your parents pay your student loan, credit card or car loan, and they have consistently paid for 12 months, that monthly payment will be excluded from your debt ratio.
Some states are also helping home buyers saddled by student loan debt. Maryland launched a program to provide a second mortgage, up to 15% of a home’s purchase price, in the form of a zero interest mortgage loan with no payments! “To qualify, borrowers must have at least $1,000 in student debt, be current on their student loan payments and be able to pay off the debt entirely at the time of the home purchase. Borrowers also need to be able to afford to put down 5% of the home’s purchase price, and the home must be one of the state-owned properties reserved” for those with student loans. The state forgives 20% of the student loan balance each year the buyer remains in the home. If your student loan is equal or less than 15% of the home’s purchase price, in five years, the student debt could be paid off!
New York has a program offering up to $15,000 in down payment assistance to recent graduates who buy homes in one of several upstate cities. To qualify, home buyers “need to have graduated with a degree within the past 48 months, have good credit and steady employment.”
Ohio provides down-payment assistance and a lower interest rate to recent college graduates who purchase homes in the state. Buyers must be first-time buyers, graduated in the last two years, and have a credit score of at least 640. There are regional income and home price limits.
For more information on the articles recently published, use these links:
From the Los Angeles Times, Good News for Home Buyers with Student Loan Debt
From the Wall Street Journal, Help for Young Home Buyers Burdened by Student Debt
Whether or not you qualify for these new programs, you may still need to evaluate current spending to save for a home down payment. Working with a CFP™ professional can help you evaluate spending priorities so you are ready when the perfect home hits the market. Everyone should have a plan for reaching their financial goals.