The Urban Institute says each of the five federal mortgage programs need to get on the same page when it comes to how they treat student-loan debt. Standardizing the formula would reduce confusion and promote fairness in lending.
In an article posted to the Institute’s blog, the three co-authors (Kristin Blagg, Laurie Goodman, and Kelia Washington) say many of the 44.7 million Americans with student loan debt are also in their prime home buying years. And more than 8 million of them use income-driven repayment (IDR) plans for their student loans, which require special calculations for determining mortgage lending.
However, the authors add, the three different government agencies and the two government-sponsored enterprises each use a different way of accounting for IDR plans when underwriting mortgages. This is confusing to borrowers and has disadvantaged some potential first-time homebuyers.
The suggestion, the article says, is all five government institutions — Fannie Mae, Freddie Mac, the US Department of Veteran’s Affairs (VA), the Federal Housing Administration (FHA), and the US Department of Agriculture (USDA) — should use the same standard for accounting for IDR when underwriting mortgages, a standard that makes the most sense from an underwriting standpoint. The most logical way is to allow the DTI ratio to “count” only the actual amount paid.
Read the Urban Institute blog for more details on how lenders should treat student loan debt.