The new Saving on a Valuable Education (SAVE) student loan repayment plan is set to help student loan borrowers qualify for a mortgage more easily. SAVE is an income-driven repayment plan that sets the monthly student loan payment as a percentage of discretionary income. Beginning in July 2024, undergraduate student loans on the SAVE plan will drop to 5% of the borrower’s discretionary income, while borrowers with both undergraduate and graduate school loans will pay a weighted average between 5% and 10%. The plan also increases the income exemption for those who qualify for $0 monthly payments from 150% to 225% of the federal poverty limit.
For borrowers looking to move from renting to homeownership, the benefits of the SAVE plan could be significant. Lower monthly student loan payments help lower the debt-to-income ratio, a factor lenders consider when determining how much consumers can borrow in a home loan. A recent report from the Center for Responsible Lending and California Policy Lab estimates that enrolling in the SAVE plan could reduce average monthly student loan payments from $197 to $69, potentially reducing the borrower’s debt-to-income ratio by 1.5% to 3.6%.
Enrolling in the SAVE plan and securing a lower monthly student loan payment can make borrowers more appealing to mortgage lenders. A lower debt-to-income ratio can free up cash that can be used for mortgage payments, allow borrowers to borrow a larger amount upfront, or both. Additionally, having a lower student loan payment makes it easier to save up for a down payment on a home. Certain types of home loans use 0.5% of the outstanding loan balance when calculating debt-to-income ratio, which may pose a problem for borrowers with $0 monthly payments, particularly for those with a large student loan balance.
While becoming a homeowner depends on various factors including employment history and credit score, qualifying for a lower monthly student loan payment through the SAVE plan can boost a borrower’s chances of homeownership. The plan can be beneficial for those looking to minimize their student debt payments and potentially have the remaining balance forgiven. However, understanding the different lending criteria when shopping for a home loan can help borrowers make informed decisions. Ultimately, the SAVE plan offers advantages for borrowers aiming to own a home, but achieving homeownership will still require a substantial income and down payment.
