Whether the barrier is financial or psychological or both, student loan debt is holding back potential first-time homebuyers from saving for a down payment and adequately preparing for homeownership.
A recent joint study on Millennials and student loan debt by the National Association of Realtors and American Student Assistance, a nonprofit organization, found that only 20 percent of Millennials currently own a home. Among the 80 percent of Millennials who don’t own a home, 83 percent said that student loan debt has impacted their ability to buy a home. The majority said they expect to delay buying a home by a median of seven years.
While numerous nonprofit organizations, government agencies and lenders grapple with how to help borrowers repay their student loans and still become homeowners, Lennar Corp. and its subsidiary, Eagle Home Mortgage, have introduced a new loan program as one potential solution.
Eagle Home Mortgage’s Student Loan Debt Mortgage Program provides a seller contribution from Lennar of up to 3 percent of the purchase price of the home to pay off some of the buyer’s student loan debt. According to the New York Federal Reserve, the average balance among student loan borrowers is $26,700.
“In recent years, we’ve seen unease among some buyers, especially younger ones, about taking out a mortgage as they work to pay off student loans,” says Bruce Gross, chief financial officer for Lennar. “Even when they qualify for a mortgage and when homeownership could actually be cheaper than renting, some prospective buyers simply haven’t wanted to take on what they perceive as an additional obligation. This program rewards that financial responsibility and discipline by paying off part or all of a buyer’s student loans to make the path to homeownership less stressful.”
The student loan payoff amount does not add to the mortgage balance, nor does it increase the home price.
“The objective of the program is to put homeownership within reach of more people by alleviating some of their concern about debt loads,” says Gross. “All sellers, including new-home builders, have long been able to provide seller concessions or contributions up to certain percentages as part of a transaction — whether it’s paying part of closing costs or including new landscaping. This program simply establishes a new category for student loans. The rules are very clear that a seller can’t just raise the price of a home to recoup a contribution at closing.”
Student Loan Debt Program Backed by Fannie Mae
The conventional loan program, approved by Fannie Mae, essentially expands the opportunity for seller contributions beyond the standard 3 percent cap for loans with a down payment of 10 percent or less, says Doug Cropsey, senior vice president of secondary marketing for Eagle Home Mortgage. For this program, the seller is Lennar.
“The program is meant to help people who are light on resources for down payment funds,” says Cropsey. “They can get 3 percent as a seller contribution to closing costs and then another 3 percent to pay down their student loans, which allows them to focus on their down payment funds.”
For now, Cropsey says, this is a pilot program with Lennar. The expectation is that the program could be open to other builders in the future.
The amount of the student loan contribution is capped at $13,000, since the maximum loan limit for a conventional loan is $421,400.
“Borrowers need to qualify for the loan through the Fannie Mae Desktop Underwriting program, which requires good credit,” says Cropsey.
Safeguards Built into the Program
The student loan mortgage program doesn’t change the affordability of the home purchase.
“The loan program is more about reallocating resources to help people pay off their student loans,” says Cropsey.
The debt-to-income ratio calculation, which compares your gross monthly income with the minimum payment on all recurring debts, will include the student loan payments of applicants.
“Buyers must qualify for their mortgage with their existing student loan payments considered as part of the standard underwriting process,” says Gross.
Cropsey says their previous student loan payments will be considered as part of the debt-to-income ratio, even if the borrower’s loans are paid in full.
“These borrowers must be very well-qualified and demonstrate their ability to repay the mortgage,” he says.
In addition, Cropsey says that borrowers must take a Fannie Mae-approved homebuyer education course to qualify for this loan program.
When the program was introduced, some industry experts worried that it could drive up housing costs because of increased demand and also further limit the availability of affordable homes for first-time buyers.
“Affordability is always a concern, particularly in rapidly growing markets,” says Gross. “For many buyers, though, owning a home can actually be cheaper than renting. We’ve never believed that helping responsible buyers achieve the dream of home ownership raises prices across the board.”
Eagle Home Mortgage’s student loan mortgage program is available to buyers of Lennar homes. Eagle is licensed to lend in 40 states and the District of Columbia.
“We’re still in the early stages as we introduce the pilot program to buyers across the country,” says Gross. “Our hope is that we’re able to help a significant number of families pay down student debt so they can achieve their dreams of homeownership.”