Some student loan forgiveness will benefit mortgages

Student loan forgiveness for more than 40 million people announced this week could help improve mortgage eligibility and performance for a subset of them.

However, housing finance experts warn the relationship between education-related debt and home loans is often not a straightforward one, and maintain advice they’ve issued in the past when it comes to student loan relief: don’t count on it until it’s in hand.

Of the 43 million borrowers receiving forgiveness, less than half (around 20 million) will find the five-figure amount sufficient to pay off what they owe, according to a Biden administration press release. So the number of borrowers who immediately see a significant change in their eligibility for or ability to repay mortgages will be limited.

“I see a lot of borrowers with $100,000 to $200,000 of student loan debt, and for someone on a $40,000 annual salary, forgiveness of $10,000 or $20,000 will not have much impact as far as qualifying for a mortgage,” said Steve Cartwright, senior loan originator, Amerifirst Home Mortgage.

The amounts won’t be enough to significantly change the circumstances of many, said Emmanuel Lewis, a borrower who recounts difficulties he’s had attaining sustainable homeownership. The accumulation of student debt and the shutdown of Hesser College contributed to the challenges.

“Student loans made it harder and more expensive to buy a home and buy a car. I even considered working overseas in Afghanistan to pay off my loans,” he said, noting the military’s financial eligibility criteria meant his debt even precluded that as an option.

“We need full forgiveness for those who seek it,” said Lewis.

That said, student-debt relief, with some estimates suggesting the average taxpayer could end up paying around $2,000 to cover, is significant enough to help certain borrowers overcome obstacles to homeownership and build generational wealth, given that $20,000 of potential forgiveness is around the median amount low-income student loan borrowers owe. It’s also particularly important when it comes to the Biden administration’s goal to narrow the racial homeownership gap that’s widest between white and Black consumers. 

“If you did not come from a family that owned a home, you had to borrow money to go to college, which then makes it harder for you to qualify for a mortgage. This will be a step in breaking that cycle,” said Janneke Ratcliffe, vice president at the Urban Institute’s Housing Finance Policy Center.

In surveying a representative sample of 1,995 student loan borrowers about mortgage obstacles on behalf of the National Association of Realtors last year, Morning Consult found 47% lacked a down payment, 45% couldn’t meet debt-to-income requirements and 43% hadn’t even tried qualifying.

The most immediate underwriting obstacle the relief addresses will likely be the DTI, particularly for the limited number of student loan borrowers who will have their total educational debt wiped out with forgiveness.

“Certainly, if you don’t have student loan debt, your debt-to-income ratio will go down,” said Kristin Blagg, senior research associate in the Center on Education Data and Policy at the Urban Institute.

The down payment benefits will likely take longer to materialize. The amount canceled can be equivalent to one, but such debt relief doesn’t immediately translate into an equal amount of cash. Rather, the related reduction in or erasure of debt payments will add up over time.

“I think that’s going to come via an accumulation of extra savings, monthly over a series of 18, 24, 36 months,” said Kyle Enright, president, mortgages, at Freedom Financial Network.

Student loan debt cancellation is also likely to help improve the outlook for existing loans as well, he added.

“All other things equal, when consumers have more cash flow available for debt service on their mortgage, the performance of those mortgages should be better,” said Enright.

But figuring out how and whether canceled student debt will affect prerequisites for mortgage programs may not be easy. Some differences have persisted among government-related agencies in terms of how debt cancellation of income-based student loans is treated, despite the move the Federal Housing Administration made last year to address this issue.

“There’s even more variability in loan modification rules. They vary by lender/servicer as well as frequently the subservicer,” Enright said. “That can be challenging in the sense that it’s very hard for the consumer to discern what they may or may not qualify for.”

The Biden administration could consider further adjusting and potentially harmonizing the way the housing agencies treat income-based student loans in light of both the new student debt forgiveness and the planned expiration of pandemic-related forbearance for education loans at the end of this year. (Mortgage-eligibility criteria for borrowers with student loan forbearance also has been inconsistent.)

As part of its announcement, the Biden administration also proposed making additional changes to income-based loans that some experts think would provide significantly better terms for borrowers. The experts say these may have even more potential to open up homeownership than loan forgiveness.

“There is one aspect of the plan that will make a difference — the income-driven repayment portion,” Cartwright said. “That portion has good implications as far as a borrower qualifying for a [home] loan as long as the loan guidelines will allow it.”

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