A row of townhouses in Alexandria, Virginia.<\/p>\n
Grace Cary | Moment | Getty Images<\/p>\n<\/div>\n<\/div>\n<\/div>\n
A new, more affordable repayment plan<\/a> for federal student loan borrowers may come with another advantage: It could make it easier to become a homeowner<\/a>.<\/p>\n The Saving on a Valuable Education, or SAVE plan<\/a>, can cut borrowers’ monthly payments in half, and leave many people with a $0 bill. The Biden administration officially rolled out “the most affordable repayment plan yet” over the summer<\/a>.<\/p>\n “Switching to a repayment plan that has a lower monthly payment can help a borrower qualify for a mortgage,” said higher education expert Mark Kantrowitz.<\/p>\n<\/div>\n Half of student loan borrowers<\/a> \u2014 including 60% of millennial borrowers \u2014 who haven’t yet purchased a home say their education debt is delaying them from doing so, according to a 2021 report by the National Association of Realtors.<\/p>\n Here’s how the SAVE plan could soon change that, experts say.<\/p>\n<\/div>\n Your\u00a0debt-to-income ratio<\/a>, which is usually calculated by dividing all your monthly debts by your monthly income, is a key factor in mortgage underwriting, said Christelle Bamona<\/a>, a senior researcher at the Center for Responsible Lending.<\/p>\n “Those eligible for SAVE will experience reduced payments, which will in turn lower their debt-to-income ratio,” Bamona said. Most borrowers should qualify for the SAVE plan as long as their loan is in good standing.<\/p>\n More from Personal Finance:<\/strong> Borrowers making payments on their student debt who enroll in SAVE could see their ratio fall somewhere between 1.5% to 3.6%, according<\/a> to a new report by the Center for Responsible Lending.<\/p>\n Here’s how that happens.<\/p>\n For one, the SAVE plan increases the income exempted from your payment calculation to 225% of the poverty line, from 150%. As a result, the first roughly $33,000 of your income won’t be factored into your monthly obligation, up from around $23,000 on the other income-driven repayment plans. These numbers represent single individuals. More income is protected as family size increases.<\/p>\n<\/div>\n Starting in July, an even bigger perk of the plan will be available.<\/p>\n Instead of paying 10% of your discretionary income a month toward your undergraduate student debt under the previous Revised Pay As You Earn Repayment Plan, or\u00a0REPAYE<\/a>, borrowers will be required to pay just 5% of their discretionary income. The SAVE plan has replaced REPAYE.<\/p>\n Kantrowitz provided some examples of how much borrowers could see their bills drop.<\/p>\n Previously, someone who made $40,000 a year would have a monthly student loan payment of around $151. Under the SAVE plan, their payment would fall to $30.<\/p>\n Similarly, someone who earned $90,000 a year could see their monthly payments shrink to $238 from $568, Kantrowitz said.<\/p>\n<\/div>\n In the past, most mortgage lenders assumed that a borrower’s monthly student loan payment was a certain percentage of their loan balance, even if the actual payment was lower, Kantrowitz said.<\/p>\n Fortunately, he said, “They now base it on the actual loan payment<\/a>.”<\/p>\n There’s one catch: Many mortgage lenders won’t use a $0 monthly student loan payment in their underwriting process, which the SAVE plan could leave many borrowers with. In such cases, lenders may still calculate your monthly obligation as a share of your total debt.<\/p>\n The Center for Responsible Lending wants to see this change.<\/p>\n “By not counting their monthly payments as $0 in the underwriting process, lenders are artificially inflating consumers’ monthly debt obligation,” Bamona said. This could potentially prevent millions of low-income Americans from getting a mortgage, she added.<\/p>\n<\/div>\n The SAVE plan may also help more people get in financial shape to buy a house, experts say. That’s because a smaller monthly payment could enable them to direct more cash to their savings, and reach their down payment goal faster.<\/p>\n Student loan borrowers who are first-time homebuyers may also be eligible for financial assistance<\/a>, Bamona said, and should research their options.<\/p>\n “Grants or down-payment assistance programs may be accessible to first-time homebuyers, provided by agencies and organizations within their state or municipality,” she added.<\/p>\nSmaller payments can help prospective homebuyers<\/h2>\n
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Saving for a down payment may be easier under SAVE<\/h2>\n