The Biden administration is anticipated to announce the forgiveness of $10,000 in student loan balances for borrowers earning less than $150,000 annually, according to numerous news reports. Your ability to buy a home may be affected if all or part of your balance is forgiven. This could have an effect on many aspects of your financial life.
However, the extent of that impact is influenced by things like your stage in the home-buying process and whether you have a degree. Some people may find that forgiveness changes everything, while others may need to look into other options, such as government-backed mortgages or income-based student loan repayment, in order to afford a home.
This is how the policy may impact you.
You might have a lower debt-to-income ratio if you plan to purchase soon.
Erasing $10,000 of your student loans now could lower your debt-to-income ratio if you’re actively looking to purchase a home and intend to apply for preapproval. This number demonstrates to lenders how much of your income is already going toward debt repayment and illustrates how challenging it may be for you to make your mortgage payment.
Add up all of your monthly debt payments, divide the total by your monthly income, and convert the result to a percentage to determine your debt-to-income ratio. Your application will be more appealing if that number is lower.
According to a 2021 Zillow report, “Mounting student debt risks putting many would-be home buyers very close to or over conventional debt-to-income ratios, disqualifying them from homeownership even before they’ve applied for a mortgage.”
At the time of the report, Zillow estimated that $10,000 of forgiveness per borrower could lower as many as 1 million prospective home buyers’ debt-to-income ratios below the optimum level required to qualify for a loan, potentially resulting in a lower interest rate and a higher likelihood that they will be accepted. For conventional mortgages, this percentage is 36 percent, for VA, USDA, and FHA loans, it is 41 percent and 50 percent, respectively.
$10,000 might push you over the edge if you’re just on the verge of being eligible. According to Christopher Haigh, a certified financial planner and co-founder of the financial advisory firm Iconoclastic Capital, the majority of borrowers won’t notice a difference.
If a borrower’s federal student loans are reduced by $10,000 and they are following a standard repayment schedule, they will likely only save about $100 per month, according to Haigh. “They might qualify for a $2,000 mortgage instead of a $1,900 monthly mortgage.”
This could help you with your credit if you have loans but no degree.
However, according to Jung Choi, a research associate at the Urban Institute, a think tank for economic and social policy, the impact of this debt relief plan could be “really large” for borrowers who took on college debt but left before finishing their degree.
In this situation, borrowers are burdened by debt without the financial advantages of a degree. Furthermore, according to Choi, “there is some data indicating that Black young adults are also more likely to miss their student debt payments than White young adults,” meaning they are also more likely to receive credit delinquencies.
However, it might be simpler to keep up with payments if your loan balance — and monthly payments — are reduced by forgiveness. And that might increase your chances of getting a mortgage as well as your credit.
You might be able to get rid of PMI sooner if you own a home.
The Biden administration’s relief plan might also assist in making your mortgage payments more manageable if you already own a home.
Private mortgage insurance must be paid by buyers who put down less than 20% on a home until they have 20% equity in the property. Lenders are required to insure their interest because a lower down payment makes their investment riskier.
You could put the difference in your student loan payments toward your mortgage instead once the forgiveness plan is in effect, bringing your equity stake closer to 20 percent.
Borrowers continue to face obstacles.
The success of the suggested student debt relief plan is significantly influenced by current market conditions. Even if you have less debt to pay off, it can be challenging for young homebuyers to find affordable housing in the current market, according to Choi.
Many buyers are having difficulties, whether or not they have student debt, as a result of the double-digit growth in home prices from prior years and the rising interest rates on mortgages.
“I think this kind of approach would have had an even larger impact if we were in normal times, or even just last year, when the rate was historically low,” says Choi.
According to Haigh, paying off $10,000 in student loan debt may have a slight detrimental effect on some borrowers’ credit scores because it may shorten their credit histories. While paying off the balance can be advantageous in the long run for borrowers who plan to buy a home soon, student loans are frequently among the borrower’s first credit accounts.
If $10,000 is insufficient, follow these steps.
For borrowers with sizable student loan balances, $10,000 in loan forgiveness might seem insignificant. However, there are other initiatives that can reduce the cost of home ownership.
For instance, if you attended medical school, you might take into account a physician loan, which offers doctors flexible lending terms. Programs like Homes for Heroes also provide rebates and reduced fees to help professionals like teachers and nurses afford homes.
Even if you have a large student loan balance, you can still improve your borrowing prospects. Consider income-based payment plans, advises Haigh. “If you have a smaller payment commitment, it might be better.”
Lenders of mortgages are more interested in your debt-to-income ratio than your overall debt load. You can free up more money for a mortgage payment by lowering your monthly payments through an income-based payment plan or private refinancing.
Make sure you’re structuring things in the most advantageous way possible if you’re married, advises Haigh. This might entail filing so that your spouse’s income isn’t taken into account for your income-based payment plan or applying for a mortgage in one of your names if the other has more debt or a lower credit score.
Every borrower will experience the Biden administration’s plan differently. However, no matter where you are in the process of becoming a homeowner, $10,000 of relief might help you get a little closer.
