New Doors Open In Home Lending For College Grads With Debt

Sep 14, 2017

Mortgage backers Freddie Mac and Fannie Mae have recently changed lending rules to give more leeway to borrowers like Kristen Griffin with high student loans.

Griffin is a librarian at Nemo Vista High School in Center Ridge. She and her husband Mark are window-shopping on Zillow while their 2-year-old son Fletcher sleeps nearby.

“It has a huge front porch. I am a front porch sitter,” she says looking at a house on the site. It’s an older home with extra room for a library.

“I’m a librarian, and you don’t see any books in here do you? Because there’s no room for any books, but this would be a beautiful library,” she says.

But together they have over $100,000 in student loan debt mostly from her master’s degree in library science. Two years ago, they weren’t able to pre-qualify for a loan, but their chances may be different now.

Mortgage backers Fannie Mae and Freddie Mac have new lending rules that would consider the couple’s lower monthly student loan payments that they negotiated instead of the maximum monthly payment. That means for people in income-based repayment plans, the debt-to-income ratio calculation made by the bank can include their actual monthly student loan payments rather than the previous 1 percent calculation.

So, to the bank, someone like Griffin who has nearly $100,000 in student loans would be considered to have a $1,000, or 1 percent, monthly payment rather than the much lower payment she actually has. This was meant to shield lenders in the event that a borrower might lose their job or stop participating in an income-based repayment plan.

Another change raises the total amount of debt the couple can have and still get a mortgage— from 45 percent up to 50 percent of their income.

According to federal data, 21 percent of Arkansas loan borrowers are on income-based repayment plans.

Bill Worthington is a loan officer for the Bank of Little Rock. He’s seen a lot of people carrying student debt come through his doors, and he says most of them are on income-based plans.

"The debt is so high. I mean, they just can't get a loan."

“The debt is so high. I mean, they just can’t get a loan,” he says.

In fact, a recent survey by the National Association of Realtors and the group American Student Assistance shows about three-quarters of graduates say student loans are the reason they keep renting. But the new rules could make a difference in people’s ability to borrow.

Since the changes, Bill Worthington has approved several borrowers who couldn’t have gotten loans before.

“I think it is a good thing now because it is allowing people to get into homes that normally wouldn’t, that would have to keep renting for a while,” says Worthington.

While these changes only apply to conventional mortgage lending, he expects government-backed Fair Housing Administration loans to follow.

Betsy Mayotte works for the Center for Consumer Advocacy. She says part of the challenge is it’s taking people longer to pay off student loans than it used to, and borrowers are getting older.

“Over half of all student loan borrowers are over 30 and a third of them are over 40, so student loan debt is not a young person’s problem anymore.”

Griffin, the 36-year-old school librarian, says she sees that in her own family.

“When my parents were 35-years-old, they were probably on their third home by then,” she says.

Mark Griffin giving his 2-year-old son Fletcher a bath in the kitchen sink.
Credit Sarah Whites-Koditschek / ARKANSAS PUBLIC MEDIA

Her husband Mark is a 29-year-old network analyst. He wants to get a home because he hopes his family will start building equity. Griffin didn’t finish his bachelor’s degree and has struggled with his student loan debt since dropping out. He recently got a better paying job and expects it will change their prospects for buying.

“It’s definitely, at least to me personally, a sign of becoming a responsible adult, and moving on to that next level, that next chapter in your life, where you have major ownership of something,” he says.

But Mayotte cautions that for some consumers, adding a long-term mortgage on to student debt isn’t the best idea, though every situation is different.

While the Griffins have started looking at possible dream homes, they’re still saving for a down payment.

This story is produced by Arkansas Public Media, a statewide journalism collaboration among public media organizations. Arkansas Public Media reporting is funded in part through a grant from the Corporation for Public Broadcasting, with the support of partner stations KUAR, KUAF, KASU and KTXK and from members of the public. You can learn more and support Arkansas Public Media’s reporting at arkansaspublicmedia.org. Arkansas Public Media is Natural State news with context.

*Editor's note: A previous version of this story incorrectly said the report on home sales was done by American Consumer Assistance.

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