One of the two large government-sponsored enterprises that buy and securitize a significant number of mortgages in the United States is adding requirements for borrowers with student loans.
Freddie Mac on Sept. 6 directed mortgage companies to report a payment above zero for borrowers with education debt in almost all cases, including when a person's earnings are so low they qualify to make no payment.
The student loan payment submitted to Freddie will be the one listed on a credit report unless that amount is zero. In that case, 0.5% of the loan balance should be used, unless there's documentation outside the credit report supporting a different payment size.
The guidance appears to be part of the transition to the end of pandemic-related forbearance for education debt next month, when payments on those obligations will restart.
Some lenders had already been using 0.5% as a "placeholder payment" when one wasn't recorded on the credit report during the pandemic, which could limit the impact of the change, said Daniel Jacobs, managing director, TruLoan Mortgage.
Student loans with payments that adjust in line with income may be the best bet for borrowers if they still have affordability challenges when they emerge from pandemic-related forbearance and want to make progress toward reducing their debt.
"I'm sure we'll advise many clients to negotiate income-based payments if they don't have high earnings," Jacobs said.
Some permanent changes were made recently to income-based student loans that will allow for more borrowers with that type of education debt to qualify for $0 payments, making Freddie's changes potentially pertinent to more people in that category.
"There won't be more people that qualify for $0 payments than during the pandemic, but certainly more in the Pay-As-You-Earn program than would have qualified before it," said Sara Parrish, president, CampusDoor, a provider of white-labeled, private student loan services.
There will still be some ways to entirely exclude a student loan payment from debt-to-income calculations used as part of determinations related to a mortgage borrower's ability to repay but the circumstances will be limited, according to Freddie's new guidance.
They include when the loan gets to the point where there are only 10 remaining payments (or fewer) before it is forgiven, canceled, discharged or fully repaid. Also, when the full balance of the loan that's on pause due to a deferral or forbearance will essentially be entirely written off.
Borrowers must prove they have eligibility that won't change in the future for any of these aforementioned forms of relief that may absolve their responsibility for a student loan.
The Biden administration has worked to maximize opportunities for student loan relief but had to back down from an ambitious forgiveness effort due to court intervention.
There will be a respite from certain late fees and adverse credit reporting for roughly a year after forbearance ends that will serve as an onramp back to paying for struggling borrowers, but those who don't fulfill their obligations will amass more debt.
As part of this transition, Freddie Mac also will be adding some new requirements for income-based student loans starting on Jan. 4 of next year.
These pertain specifically to situations where borrowers must renew proof-of-income documentation or have to meet an upsized obligation for their student loan before the first payment on their mortgages are due.
In these circumstances, lenders will have a few different options for recording payments.
One is to report as a payment 0.5% of the loan balance or the current obligation, whichever is larger. Another is to put down a future upsized amount that has documentation.
Lenders also may opt to record a future payment amount that will be the same or less than the current obligation if the borrower's been able to recertify income and gotten approval to pay that amount.
At the time of this writing, Freddie's counterpart Fannie Mae still appeared to be allowing lenders to record a zero payment for student loans if they had additional documentation beyond the credit report.
For student loans deferred or in forbearance, Fannie directs lenders to record a payment equal to 1% of the outstanding loan balance, even if it's lower than the fully-amortizing monthly obligation. They can also opt to record the latter as documented.
