On August 24, 2022, President Biden announced a plan to cancel up to $20,000 of student debt for low- to middle-income borrowers. Created to help with the financial challenges brought on by the COVID-19 pandemic, the plan is part of a comprehensive effort to address growing college costs and make the student loan system more manageable. According to a White House press release, the Department of Education will provide $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellations to non-Pell grant recipients. To be eligible to receive the relief, the recipient’s income must be less than $125,000 ($250,000 for married couples). The Biden administration says an application for debt relief could be available as early as October 1, with a turnaround time of four to six weeks.
With many recipients of debt relief falling within the Millennial age range, which represents 43% of all homebuyers in 2022, this windfall is likely to aid first-time homebuyer purchases. Here are four ways the student loan forgiveness plan may help purchase a home.
Cash for a down payment
Down payments for home loans can be as low as 3.5% for an FHA loan and as high as 20% for a conventional loan. $10,000 can go a long way toward a down payment or closing costs.
Lowering your debt-to-income ratio (DTI)
One of the factors lenders consider when evaluating a loan application is the borrower’s debt-to-income ratio. The DTI is calculated by dividing your monthly debt payments by your monthly income and converting that number into a percentage. The lower the DTI number, the more appealing the borrower is to the lender. According to a 2021 Zillow survey, student debt puts many potential homebuyers very close to or over their conventional debt-to-income (DTI) ratios, which would disqualify them from purchasing a home. The debt relief means more people may qualify with better terms because of a lower debt-to-income (DTI) ratio.
Eliminate private mortgage insurance
Homeowners with less than 20% equity in their home or who make a down payment of less than 20% must pay private mortgage insurance (PMI). An extra $10,000 toward the equity you already have in your house or toward a down payment can help you inch closer to not needing PMI.
Improve your credit score
Another significant factor in loan qualification is the borrower’s credit score. While those making student loan payments on time may see a slight increase in their credit score with their loan paid off, it can also help their score if other debts are now paid on time, if that has been an issue.
Even in the current challenging home-buying market, this loan forgiveness plan could be what first-time home buyers need to leap from renting to owning. This NASB calculator can help determine if you can save more by purchasing a home or renting. And if you have other questions about buying your first home, talk to the experts at NASB. We were recently named Top VA and First-Time Home Buyer Mortgage Lender by Nerdwallet for the second straight year. Call us at 888-661-1983 or click here for more information.
1All loans are subject to credit approval.
