Does New Law on Student Loans hurt Millennials?

Mortgage and Lending with First Option Mortgage 269761

On September 14th, 2015 the Federal Housing Authority (FHA) changed its rules on the calculation of student loan debt as it refers to the Debt-To-Income (DTI) calculation when qualifying a buyer for a mortgage (see table below). It used to be that if a student loan was in deferment for more than 1 year, the student loan payment would not be counted against the income of the buyer. This would allow the buyer to borrower more money since for every $50 spent on a student loan payment equals about $10,000 of purchase power.

Is this a good thing? 

The argument: When a student finishes school, the monthly payment can be negotiated to a lower amount based on the student’s previous 2 year’s tax returns, called Income Base Reduction (IBR). The new FHA ruling however, qualifies the student using his/her current income, not the future 2 years’ tax returns that will be used when adjusting the monthly debt. The other issue is that the student may be earning more money upon graduation but is being penalized now for trying to earn more money in the future. This ruling is really going to put a hold on the youth who are wanting to buy a house while working and going to school for a better education and more money. 

The counter argument: There is no way to know how much money the buyer will make upon graduation, so it’s not possible to know how much reduction there will be on the student loan payment in the future.. Student loans cannot be defaulted on nor can they be included in bankruptcy. They MUST be paid. Therefore, it’s inevitable that these payments will become a monthly debt to the future homeowner.

The issue for me is how and when it is being calculated. What is the answer then? As a lender, one must consider risk at all times. Should a lender risk lending money to a buyer with hopes that the buyer earns more income after graduation?

Like I said, it makes my job harder to qualify someone who makes $2000 a month in income, is allowed to use $800 to qualify for a loan but has $600 a month in student loans. My first question is, “Why are you only making $24,000 a year after paying $60,000 in tuition?” Most of the answers I get: “I can’t find a job in my major”, “There are no jobs out there”, “I don’t know”. “I haven’t graduated yet”.

Risk plays an important role in lending money and based on statistics gathered by the government, this rule, as painful and unfair as it may seem, may be a gift to a buyer trying to qualify for a mortgage loan, whose student loan debts were deferred because of their probable inability to pay the mortgage and the student loan.

Growing concern: What I know is that there are a lot of young people who are making less money and spending money they don’t have. Over just the last 6 months, I’ve encountered 12 applicants who’s bank statement were depleted from buying fast food, sometimes as much as 6 times a day at the same place. Others lost over $300 a month, several months in a row, in non-sufficient-funds banking fees or spending money using ATM machines that charge fees. A few of them spent hundreds of dollars on phone app services or buying $1000 cell phones instead of saving the money towards a home purchase. The average balance of those 12 buyers was less than $1000 and all of them required some form of down payment assistance in order to buy a home. The average credit score was just over 620 and collection accounts plagued the credit report from utility companies, cell phone companies and unpaid rent. More than half had a college degree and the average income for all of them was less than $30,000 a year while racking up over $40,000 of student loan debt.

So much money is spent on college tuition and I believe that many of these institutions are not offering classes to these young folks on how to manage their money, save their money or how to gain the confidence they need to find better paying jobs. Until they do find a better paying job or pay off their student loans, they won’t be buying a house if their student loan debt disqualifies their ability to obtain a mortgage.

The solution: We need to get out and educate young people on how to apply for college with regard to giving them proper guidance on choosing a degree that offers a profession worthy of paying back the student loans.  If we tackle this issue now, then future generations will be able to buy a home without the concern of student loans keeping them from their dream of home ownership.

Starting on September 15, 2015, a bunch of different rules came out on how to handle student loan deferments for FHA, VA, USDA, and Fannie and Freddie:


     If Payment                   Payment begin                      If Payment is                            If Payment

already established            in 12 months                       to be deferred                    has been reduced


Greater of                          Greater of                               Greater of                                       Greater of

1% of balance                   1% of the balance                1% of the balance                       1% of the balance

or payment                       or payment                           or payment                                       or payment

on credit report               on credit report                   on credit report                             on credit report




Count monthly               Count anticipated                  Don’t count if                            Use reduced payment

Payment                          monthly payment                payment deferred                     after receiving proof

                                                                                            13 months or more                                of such


Fannie Mae


Use either of:                    Use either of:                      Use either of:                                  Use either of:

1% outstanding                 1% outstanding                    1% outstanding                                1% outstanding

Balance;                             Balance;                                 Balance;                                           Balance;

Credit report                     Credit report                        Credit report                                    Credit report

Payment; Use                   Payment; Use                      Payment; Use                                  Payment; Use

Table below                       Table below                        Table below                                      Table below


Freddie Mac


Count monthly                  Count monthly                       Use 1% of outstanding              Prove reduction.

payment                             payment                                  balance                                         If > 10 months

                                                                                                                                                      Remaining, must count

                                                                                                                                                      against income




Fixed rate: entire              Greater of 1%                      Greater of 1%                              Greater of 1%

payment used.                 of balance or                       of balance or                                 of balance or

Variable rate: 1%             fixed payment on             fixed payment on                         fixed payment on

of loan balance.                credit report                         credit report                                  credit report.


Exceptions: Lower payments shown on credit report may be used if proven that the loan is a fixed rate.                         



Fannie Mae Repayment Period Table


Balance                               Repayment period

$1 - $7499                          10 years

$7500 - $9999                   12 years

$10,000 - $19,999            15 years

$20,000 - $39,999            20 years

$40,000 - $59,999           25 years

$60,000 or more              30 years


Example: Balance $17,500. Repayment period 15 years. Interest rate 4%. Monthly payment: $132

Comments (3)

Susan Haughton
Long and Foster REALTORS (703) 470-4545 - Alexandria, VA
Susan & Mindy Team...Honesty. Integrity. Results.

Very interesting reading;  I wonder why these students' families did not teach them anything about finances while they were growing up?  My parents guided me very carefully throughout the years so that by the time I started college, I had a substantial nest egg from a part time job, and had already established credit. 

Perhaps we need to add high school courses that would do the same thing where parents are unable or unwilling to educate their children properly. 

Jul 12, 2016 03:42 AM
Bill Polack

Thanks for your comment Susan. I believe it's a generational thing. I'm over 50 and my parents taught me about money. However, people my age aren't teaching it to their kids. Not sure what happened along the way. I agree that educating kids before they graduate is a good idea. Unfortunately, most public (government run) schools won't allow kids to learn about money. I've been teaching finance to middle school kids for several years now (on Saturday's) and they really enjoy the information that their parents never mentioned.

Jul 13, 2016 06:21 AM
Cody Carmen
Adhi Schools, LLC - Rancho Cucamonga, CA
Market Analysis--Educational Content, Adhi Schools

Very interesting post Bill Polack. I'm obviously in the affected age group and know many, many more. Student loan debt is definitely a realistic concern for lenders. Too many young people have a lot of debt that will stay with them for a long time (whether this debt is "worth it" is a complicated discussion) and when lower credit score and low bank balances are paired with it I would hesitate to lend without a letter from an employer to assure me of significant earnings on the way.

I know that is common in the rental process in some major cities now (I just submitted a virtual truckload of documents to a landlord in Brooklyn to prove I can pay my future rent). 

I think this is a very important topic and I hope more people keep reading. 

Jul 12, 2016 08:00 AM
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

Millennials will soon be a major force in driving the market. The more we can learn about this enigmatic home buyer, the better.

Aug 06, 2017 05:53 AM

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