During the summer of 2023, the Department of Education introduced the Saving For a Valuable Education (SAVE) student loan repayment plan under the Biden administration.
Described as the most budget-friendly repayment option available, the income-driven repayment plan may lead to a $0 monthly payment for certain borrowers based on their income, as reported by CNBC.
Anything else? By enrolling in the SAVE plan, student loan borrowers may improve their chances of qualifying for a mortgage.
Calculating your debt-to-income ratio involves dividing your monthly debts by your monthly income.
This factor plays a crucial role in mortgage underwriting. As the SAVE plan leads to reduced monthly payments tied to your income, it subsequently decreases your total debt-to-income ratio.
As per a recent report by the Center For Responsible Lending, borrowers who are repaying their student loans and joining SAVE might experience a decrease in their ratio by 1.5% to 3.6%.
The SAVE plan raises the income exempted from your payment calculation to 225% of the poverty line, up from 150%. For individuals, around $33,000 of your income will not be considered in your monthly obligation.
This amount has increased from approximately $23,000 on other income-driven repayment plans. Here’s the good news! As your family size grows, more of your income is considered exempt.
Cutting Student Loan Payments in Half for Faster Homeownership Savings
In the past, borrowers were required to allocate 10% of their discretionary income towards student loan payments under the Revised Pay As You Earn Repayment Plan (REPAYE).
Beginning this summer, the SAVE plan will enable borrowers to allocate only 5% of their discretionary income towards student loan payments. Monthly payments will be reduced by half for numerous borrowers. The SAVE plan has now taken the place of REPAYE.
By lowering your student loan payments, you can increase your monthly cash flow to contribute more to your savings.
In the end, you’ll be able to save money more rapidly to put towards a home down payment. In addition, having a lower debt-to-income ratio can simplify the process of qualifying for a mortgage.
