The new Saving on a Valuable Education (SAVE) student loan repayment plan is designed to help student loan borrowers qualify for mortgages more easily. This income-driven repayment plan sets the monthly student loan payment as a percentage of discretionary income, with undergraduate borrowers paying 5% of their discretionary income starting in July 2024, down from the previous 10%. Those with both undergraduate and graduate loans will pay a “weighted average” of rates between 5% and 10% of their discretionary income.
Biden’s SAVE plan also increases the income exemption for those who qualify for $0 monthly payments, raising it from 150% to 225% of the federal poverty limit. This means more individuals with higher incomes may now pay $0 towards their student loans each month, helping them save money to potentially become homeowners. For example, a single person with no dependents earning $32,000 a year or a family of four with a $67,500 annual income would pay $0 towards their student loans on the SAVE plan.
Lower monthly student loan payments through the SAVE plan can help borrowers reduce their debt-to-income (DTI) ratio, making them more attractive to mortgage lenders. By enrolling in SAVE and securing a lower monthly payment, borrowers can free up cash for mortgage payments or save for a down payment on a home. According to a joint report from the Center for Responsible Lending (CRL) and California Policy Lab (CPL), the potential impact of the SAVE plan could result in a reduction of average monthly student loan payments from $197 to $69, potentially lowering borrowers’ DTI by 1.5% to 3.6%.
While the SAVE plan can assist borrowers in achieving homeownership, there is a potential issue for those with $0 monthly payments when applying for certain home loans. Some mortgage lenders calculate DTI using 0.5% of the outstanding loan balance, even if the borrower’s true monthly payment is $0. This could pose a challenge for low-income borrowers with a large student loan balance, especially for Federal Housing Administration (FHA) loans. However, Fannie Mae uses $0 monthly payments to calculate DTI, which may benefit borrowers with $0 payments, potentially decreasing their DTI by 3.8% to 7.1%.
Overall, the SAVE plan offers numerous benefits for borrowers looking to reduce their student loan payments and potentially improve their chances of homeownership. Qualifying for lower monthly payments can positively impact your DTI ratio, making you a more appealing candidate to lenders. While buying a home still requires a substantial income and down payment, enrolling in the SAVE plan could be a positive decision for borrowers seeking financial stability and relief from student debt. Understanding the differing lending criteria for home loans can provide borrowers with valuable insights into their eligibility and potential outcomes.
