Debt Snowball – that is when you continue to roll up assorted debts into one. It can be a good thing or it can be a bad thing. When a debt snowball is used to consolidate debt into one lower and manageable payment that is a good thing. Many consumers have done it in a good way using home-equity loans to pay-off other higher interest debt.
On the other hand, when you continue to roll-up more and more debt into a debt snowball just to accumulate more debt – you are creating a disaster. Unfortunately that is what Fannie-Mae appears to be doing by changing it’s underwriting guidelines with regards to student loans & payments. Yes that same Fannie-Mae that brought you the mortgage crisis of last decade seems hell-bent to do it again.
Up until now a lender had to count the fully-amortizing payment or one percent of the outstanding loan balance of a student loan in a borrower’s debt to income ratio. That is common sense – count the full-payment or more on a debt to determine a borrower’s ability to successfully repay a mortgage. Since we the people are backing these student loans and mortgages that is a reasonable and sound lending-approach.
Well folks that sound and reasonable approach just got turned upside down by Fannie-Mae. They have now changed their guidelines to allow lenders to accept the payment for the student loan that is reflected on the credit report. No longer following the common-sense guidelines aforementioned.
Here is the problem – the government allows student loan borrower’s to negotiate a lower-payment and defer the additional payment and interest to a future date. Basically they are allowing debt to be piled upon more debt. That usually doesn’t work out very well.
Thus, with Fannie-Mae’s new guidelines you are not qualifying the borrower on their real debt to income ratio – but on a deferred reduced payment that will be due at some point in the future.
This bad debt snowball may turn into another mortgage-crisis avalanche!