Under The Hood Of The Mortgage Machine With Mike Cass

Student Debt & Bidding Wars

Student Loan Debt Doubter in Duluth: Can you update me on the latest regarding how lenders qualify millennials with student loan debt? I’m seeing some inconsistencies from lender to lender and student loan payments can make a huge difference to my clients when they are determining how much home they can afford.

Cass: This is a timely question, as the mortgage lending industry takes its direction from the large loan aggregators such as Fannie Mae and Freddie Mac, and this topic has been a source of confusion and, as you say, can make a huge difference to a homebuyer saddled with student debt. According to the Federal Reserve Bank of New York, seven of 10 graduates of public and nonprofit colleges in 2015, has student loan debt, with recent graduates averaging $34,000 in student loan debt.

To look “under the hood” on this topic, we first have to be clear on a separate topic – income based repayment (IBR) on student loan debt. The link below will give you an exhaustive review on this subject, but as a summary I would describe IBR as a repayment plan that sets monthly student loan payment at an amount intended to be affordable based on individual’s income and family size. Most federal student loans are eligible for at least one income- driven repayment plan, and the reduction in payments can be very significant. https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment.pdf

While an IBR payment plan is fairly easy to execute, the challenge for the mortgage industry has been to get clarity on whether they can use that much lower IBR payment when qualifying a borrower, or if they have to use the larger, fully amortized loan payment or 1 percent of the outstanding loan balance.

The good news: In April 2017 Fannie Mae formally set policy for their lenders that allows for more support of millennials burdened by student debt. http://www.fanniemae.com/portal/media/ financial-news/2017/student-loan-debt-6546.html

Losing The Bidding war in Wayzata: I’ve had a frustrating summer losing out on bids in multiple bid situations. Any suggestions you can offer me?

Cass: That is certainly the topic of the summer of 2017. The article, “5 Tips for Buyers in a Tight Housing Market” from the NAR is a great starting point.

I’d also advocate that you push your borrowers harder early in the home hunting process (long before they want to write an offer on a house) to get themselves approved for financing. I am not talking about a pre-approval or pre-qualification; these letters do not inspire confidence in your seller that you will be able to close on time and cleanly. Instead, direct your borrower to a lender that cares enough about your business to put your borrower’s income, assets and credit in front of a real underwriter to get a real approval that will stand up all the way to closing. I’ve seen many multiple bid situations determined by the quality of the offer as much as by the amount offered for the home. If you are going to be in a bidding war, you want to have the right ammunition. What good is an extra $1,000 if the lender can’t deliver?

Mike Cass invites you to submit your questions to be addressed in future columns. Questions may be edited for space or clarity. Send your questions to mcass@resultsmortgage. com. Mike Cass has served in various mortgage roles including loan origination, loan processing, underwriting, closing, post-closing and finance. He draws on these experiences as president of Results Mortgage LLC, a Twin Cities based lender.