In a recently released bulletin by Freddie Mac, the enterprise reports that it has updated requirements for qualifying borrowers with student loan debt.
All of the changes noted in the bulletin are effective for mortgages with settlement dates on and after January 18, 2018—or immediately at the seller’s discretion.
According to the GSE, the purpose of these updates are in an effort to provide flexibility to exclude student loan debt from the monthly debt-to-income (DTI) ratio “when it is likely that student loan payments will no longer be required in the near future, or are not required currently and will not be required in the future.”
Currently, the requirement for student loans in repayment is that when a monthly payment is not reported on the credit report, the seller must obtain documentation verifying the monthly payment amount included in the monthly DTI ratio.
However, the revised requirement will calculate monthly DTI ratio, using the greater of the monthly payment amount reported on the credit report, or 0.5 percent of the original loan balance or outstanding balance as reported on the credit report—whichever is greater.
“Our current requirements were developed based on traditional student loan repayment plans that provide for fully amortizing monthly payments typically reported on credit reports,” the bulletin reported.
However, the revised requirements continue to permit the use of the reported payments for student loans with fully repaying monthly payments. while also providing a solution for evaluating student loans in income-driven repayment plans
The report notes that income-driven repayment plans are becoming more prevalent in the market, therefore by requiring the use of a minimum payment of 0.5 percent of the original loan balance or outstanding balance, whichever is greater, the “risk of the potential payment shock from the monthly payment increasing after the annual recertification is reduced.”
Although, the borrower is still given the benefit of using a lower monthly payment amount that would be required under the traditional fully amortizing repayment plan.
Freddie Mac also simplified by removing the requirement that the seller must obtain documentation if a monthly payment amount is not reported on the credit report.
To read all of the bulletin updates, click here.