There's good news for would-be homebuyers with federal student loans who are enrolled in government repayment programs for struggling borrowers.
The nation's largest purchaser and guarantor of mortgages, Fannie Mae, now says that it won't hold it against borrowers if the monthly payments they're making on their student loans aren't even covering the interest they owe.
When the monthly payments on your student loans are too small to cover the interest that's owed, you've got a loan that's "negatively amortizing" -- the outstanding balance is getting bigger, rather than smaller, each month.
That's not an unusual situation for borrowers who have enrolled in income-driven repayment (IDR) plans like PAYE and REPAYE, which let them devote as little as 10% or 15% of their monthly discretionary income to repaying their federal student loan debt.
These programs can be great for struggling borrowers, because they can significantly reduce your monthly payment. According to the latest figures from the Department of Education, about 6.5 million Americans are currently paying back $333 billion in educational debt in an IDR plan.
The trade off of these plans is that by stretching payments out over a longer period of time -- up to 20 or 25 years -- your overall repayment costs may increase dramatically. This is particularly true for borrowers who don't end up qualifying for loan forgiveness.
As I detailed in a recent Forbes column, it used to be that if the monthly payments borrowers were making in an IDR plan weren't big enough to fully amortize their loan, Fannie Mae would not accept that payment for purposes of calculating your debt-to-income (DTI) ratio.
That's important because the monthly payments you make on everything from student loans to credit cards and car payments can push your DTI past the maximum limits set by Fannie Mae, Freddie Mac and FHA.
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