Monday, July 16, 2018

Student debt and homeownership – the conundrum continues

The July 31, 2017 headline on heralded good news: “New Rule Makes It Easier To Get A Mortgage With Student Loan Debt.” Forbes contributor Nick Clements, a finance industry veteran, outlined a change in Fannie Mae’s underwriting rules that appeared set to help people on income-based student loan repayment plans by eliminating a longstanding barrier to qualifying for a mortgage.

Not so fast. Nearly a year after Clements’s rosy prediction, those involved in the homeownership process at Appalachian Community Federal Credit Union (ACFCU) can tell you: People who are otherwise qualified and ready to take on a mortgage are being stymied by how student debt is treated in the process.

 “I’ve coached two different couples with major student debt who have taken action items to lower their debt portfolio, pay some things off, consolidate some things, find equity in some assets,” ACFCU Financial Coaching Specialist Adam Taylor says. “But it turns out the student debt is still preventing them from taking the next steps to homeownership.”

It’s happened time and again, Taylor says. Here’s how it works – or doesn’t, rather:

A client has worked hard to put all the pieces in place for a mortgage. She has an income-based monthly student loan payment of, say, $150. Rolled in with her other debt, that $150 leaves her able to afford a house payment that can get her into a good starter home, but her total student loan principal is $75,000.

The $150 payment would, in most situations, be added in to calculate her debt-to-income ratio, or DTI. Most mortgage lenders allow total DTI, including auto loans and any other debt, in a maximum range of 40 to 45 percent.

In the case of student debt, though, if the borrower can’t show proof the current payment will be in place for at least three years, the calculation for DTI is based on 1 percent of the total loan principal. And most student loans on income-based repayment are recalculated every year.

With this Catch 22 in play, our theoretical borrower’s DTI availability takes a $600 hit. She’d been eligible for a house payment of up to $900 with the $150 figure. That has now dropped to $300. Here in Central Appalachia, $900 a month can get someone a decent house. $300? Not so much.

It’s discouraging, Taylor says.

“They feel overwhelmed by their student debt when this housing issue comes up, and they realize there’s no real answers or way out of it.”

Indeed, it’s not that the people in question are having trouble paying their income-based payments. They’re doing everything responsibly, and often they’re in the type of careers that make that income-based payment unlikely to adjust dramatically. And if that payment did increase, it would be in concert with an overall income increase that should keep the borrower’s DTI in a fairly tight range anyway.

Thus the Forbes story, and many others that are as close as a basic Google search. Few dispute that a problem exists. Folks with ACFCU’s mortgage origination team encounter the problem too, and say that despite frequent chatter that underwriting standards are going to address it, so far little has changed.

Taylor says people shouldn’t give up. Some institutions offer “in-house” mortgage options that can provide solutions. Student loan servicers are easy to work with, too. His advice?

“Be as strategic about it as you can, understanding the income based repayment options and avoiding the rumors about those things.” 

And hope that someday, policymakers might realize the current reality is holding back many otherwise qualified people from the bulk of the mortgage market -- and the primary path to asset building in this country.

(Jeff Keeling is vice president of communications and community relations for Appalachian Community Federal Credit Union.)

Monday, July 9, 2018

Wrestling with your finances: Get coached to win

We have been working recently with a couple who know the sport of wrestling, and their journey toward greater financial knowledge and health contains some parallels to life on the mat.

I wrestled in high school and when I lost, it happened because my opponent was able to exploit my weaknesses. There is one guaranteed way to avoid losing a wrestling match: Don’t give up any points to your opponent. That means not letting your opponent take you down, escape when you have him in your control, or “reverse” control from you to him. Worse yet, let your opponent keep your shoulders on the mat long enough, and it’s over – you’re pinned.

In personal finance, your opponent is poor financial health and lack of knowledge. The opponent tries to defeat you by exploiting your weaknesses: lack of savings, high-interest “predatory debt” (think payday loans), accounts in collections or maxed out credit cards. Sometimes your opponent has those tools through no fault of your own, such as debt from an unavoidable medical expense or high student debt. Most often, you provide an opening that results from lack of preparation or a mental mistake. You don’t know how to defend a move, or you get sloppy and your opponent takes advantage.

To “win" in personal finance requires three main things: learning the right moves, practicing them, and staying fit. My wrestling fan clients have worked toward a win. They have a goal: to own their own home. They’ve begun applying their growing array of moves to defeat their opponent's main tactics against them – in their case, some old debt that’s in collections, some high-interest debt that costs them more than it should, and high credit card balances.

My financial wrestlers are saving, renegotiating and paying old debt, refinancing high-interest debt and budgeting  -- and they’re scoring points already. They know before the “match” is over, it will pay off in higher credit scores and a lower “debt-to-income ratio” (DTI). The weaknesses their opponent was exploiting will have become strengths. Their credit scores will be high enough to qualify for a mortgage and their DTI low enough for them to afford a monthly mortgage payment.

A win for you on the financial wrestling mat may be qualifying for a car loan at a good interest rate. It may be getting your first credit card and using it to build your score, refinancing predatory debt or building an emergency fund. Whatever your goal, if you’re serious about it you’ll need good coaching. Good coaches are out there at Appalachian Community Federal Credit Union and elsewhere, so find one today. ACFCU's are trained and have your best interests at heart. Learn more today: Call (423) 230-2643 and let Adam Taylor schedule a financial assessment with him or another coach, or email Adam.

(Jeff Keeling is vice president of communications and community relations for Appalachian Community Federal Credit Union.)

Monday, July 2, 2018

Easy impact: Investing in CDFIs changes communities

What do Johnson City, Tenn. pastor Brandon Waite and Security Federal Bank of Aiken, S.C. have in common? Both know that when they invest in mission-driven lenders known as Community Development Financial Institutions (CDFIs), their money is helping move mountains in the lives of people in economically distressed communities.

For Waite and Security Federal, the CDFI is Appalachian Community Federal Credit Union (ACFCU). On a day when a Washington Post article outlines predatory lending’s often crushing effects on working people, it’s especially relevant to highlight the impact of investing in a mission-driven lender, whether you’re a bank depositing $250,000 at below-market rates or a family choosing a financial institution.  

Brandon Waite
Security Federal is among more than a dozen ACFCU-investing banks that recently learned they had received “Bank Enterprise Award” funds from the U.S. Treasury Department’s CDFI Fund. The performance-based program awards institutions that increase their investments in mission-driven lenders. ACFCU’s prominent role as a go-to depository CDFI is a clear indication that the credit union is “walking the walk” as it carries out its mission.

In ACFCU’s case, the deposits help support the kind of work that prompted Brandon and Kristen Waite to become members.

“It is far too easy, I think, to get access to very high interest loans that help people meet their immediate needs, they think, by giving them a quick influx of cash,” says Waite, of Grandview Christian Church. “Ultimately that just traps people in a cycle of never being able to pay off those loans and constantly being pushed further into poverty by the decisions that they’ve made.”

The problem is grave nationwide. It’s exacerbated by Tennessee laws that earn the state a spot in the National Consumer Law Center’s “Terrible Two” along with Mississippi in NCLC’s August 2017 report on predatory installment lending. NCLC referenced Tennessee having “amended its lending laws in 2014 to allow non-bank lenders to make cash advances at 279%.

ACFCU Financial Coaching Specialist Adam Taylor, left, has
helped member Leslie Brady escape predatory loans. 
Waite learned about ACFCU’s financial coaching, credit-building loans and other opportunities because Grandview Christian works with local families that often need financial counseling. “We reached out to ACFCU and they sent somebody over to meet with these families to provide some financial counseling,” Waite says.

“Before the credit union I didn’t know that there was a bank or another credit union or anything like that that was out there trying to help families who have been caught in this cycle escape from it… Without some kind of extra outside help there’s almost no hope that they’re going to be able to pay off these predatory loans.”

When the Waites learned that CDFI credit unions count on their members’ deposits and borrowing to help achieve the mission, they joined other community members such as Kathleen Moore, who explains in this video why she and her husband made the switch.

“All the features that we enjoyed about the bank we were at before are here at the credit union, so that made it easy to switch,” Waite says. “After you’ve made that initial investment of time to switch over to the credit union your money is not only working for you, it’s working for the other people in your community. And knowing that you can do something to help people in a real and tangible way that doesn’t really require much of you after a little initial work, I think that can motivate people to make the switch.”

Across the country, people and institutions are investing to help CDFIs create positive change for economically distressed communities and families who aspire for something better. Consumers can join a CDFI credit union and help the cause with a car loan, checking account or deposit account. Institutions can make deposits at rates that enhance a CDFI’s ability to fulfill its mission.

(Jeff Keeling is vice president of communications and community relations for Appalachian Community Federal Credit Union.)

Student debt and homeownership – the conundrum continues

The July 31, 2017 headline on heralded good news: “New Rule Makes It Easier To Get A Mortgage With Student Loan Debt.” Forbes ...