Buying a Home With Student Loan Debt in California Might Get Easier

Buying a home in California with student loan debt could soon get easier, thanks to a new rule taking effect in 2017. The new provision was announced by Fannie Mae in April. It could help some borrowers lower their debt-to-income ratios in order to qualify for a mortgage loan.

Buying a Home in California With Student Loan Debt

Debt can play a big role for California home buyers who are trying to qualify for a mortgage loan. A manageable level of debt is usually not a problem, and it could actually help you qualify for financing (especially if you’ve kept up with your monthly payments). But having too much debt — from student loans, credit cards, car loans and the like — might make it harder to get a mortgage.

It has to do with something called the debt-to-income ratio. This is a comparison between the amount of money you earn each month, and the amount you spend toward your recurring debts. Banks and lenders use this ratio to ensure you aren’t taking on too much debt, with the addition of a mortgage loan. Thus, it protects lender and borrower alike.

In many cases, buying a home in California with student loan debt is entirely possible. But there are scenarios where the would-be home buyer simply has too much debt to take on a mortgage obligation, and is therefore unable to qualify for financing.

Related: California home buying requirements

But a new provision from Fannie Mae could make it easier for California home buyers with student loan debt to qualify for mortgage financing — particularly if they can show that some of their debt obligations have been paid by someone else, like a parent.

New Rule Could Benefit Some Borrowers

Freddie Mac and Fannie Mae are the two “government sponsored enterprises” or GSEs that buy and sell bundled mortgage loans via the secondary market. These corporations have rules and requirements for the kinds of loans they can buy, and those guidelines can in turn affect home buyers and mortgage shoppers in the primary market.

So when Freddie and/or Fannie ease their purchasing criteria, it can also make it easier for borrowers to qualify for home loans. And that’s what happened last month.

On April 25, 2017, Fannie Mae announced in a news release that it would relax its guidelines for mortgage applicants who have student loan debt (as well as other forms of debt). In short, borrowers who can show that some of their obligations were paid by someone else in the past could end up with lower debt-to-income ratios — and a better shot at qualifying for a mortgage loan.

“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution,” said Jonathan Lawless, Vice President of Customer Solutions at Fannie Mae.

The bottom line: Buying a home in California with student loan debt might be easier than people realize. New programs coming onto the market have made it easier for such borrowers to qualify for financing. The only way to find out where you stand is to speak to a mortgage company, like us!