How the New Student Loan Repayment Plan Affects Homeownership

Sixty percent of would-be 1st time buying millennials report student debt is the big delay. Here’s why that can change for many.

There’s big news in the world of student loan repayment plans which is potentially huge news for aspiring homeowners. The Revised Pay As You Earn Repayment Plan (REPAYE) has been replaced by SAVE, which requires student loan borrowers to pay just 5% of their discretionary income. In this article, we’re looking at how a change from 10% to 5% makes a big difference for potential first-time buyers.

The DTI Change

If a borrower has student loans, debt-to-income ratio is often the biggest challenge in qualifying for a mortgage. This is a calculation of total monthly obligations against the borrower’s income to determine whether or not the home is affordable. Under the SAVE plan, buyers earning $40-50k or more are seeing the kind of dramatic decrease in their debt-to-income ratio that allows them to qualify for a mortgage. In fact, the Center for Responsible Lending reports that borrowers will see a 1.5% to 3.6% decrease in DTI.

Take, for instance, someone earning $90k a year. Their monthly student loan payment has now decreased from $568 to $238. That extra $330 can go a long way in pushing a borrower’s DTI under the limit. Alternatively, let’s say a borrower was previously able to get pre-approved for a certain price, just not quite enough for the kind of home they want. It’s time to revisit the pre-approval and see if a savings of $330 per month will impact the home budget.

Saving Up

Student loan borrowers earning $30-40k or less (depending on family size) will see the most dramatic drop in their monthly payment, as it plummets to $0. The downside, as it relates to qualifying for a mortgage, is that standard underwriting practices won’t factor in a $0 payment, but rather calculate the monthly obligation as a share of the total debt. While the Center for Responsible Lending is working to change this, there is one light at the end of the tunnel. These borrowers still free up potentially hundreds of dollars per month that can go toward saving for a down payment. While buyers in this income bracket might continue to face the DTI challenge today, we’re keeping in touch while they save up for a brighter future.

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If you’re a student loan borrower who has moved to the SAVE plan, you already know it’s a major change to your financial success. But have you considered this means homeownership success too? If you’re ready to explore a new path to building wealth, we’re here to help!

Nova, A. (13 Feb 2024). New student loan repayment plan could make it easier for borrowers to become homeowners. CNBC. https://www.cnbc.com/2024/02/13/new-student-loan-payment-plan-may-help-borrowers-become-homeowners.html