Fannie Mae is providing some relief for homeowners who are struggling with debt from student loans. Many people with student debt say that their student loans are a big reason they have not taken any steps towards buying a home of their own. Fannie Mae, which is the largest purchaser of mortgages in the US, recently announced three big changes to their policy that can make it a lot easier for those with outstanding student loans to qualify for a mortgage. These three changes, all of which are effective immediately, will greatly help people struggling with student debt in the process of becoming homeowners.
This first change helps to simplify the calculation of the monthly student loan payment, and is very beneficial to those using income-driven repayment plans. Many people with student debt have what are called negatively amortizing loans, meaning that the monthly payment is less than the interest building every month. This results in an outstanding balance that is growing every month, even though payments are going towards it. This situation is actually fairly common for those using income-driven repayment plans, because these plans allow you to put only a very small percentage of monthly income towards paying off student debt.
Although these programs are helpful for many people since they can greatly decrease a monthly debt payment, they come with a trade-off. The longer amount of time that payments are stretched out over, the more interest accrues, meaning that while these plans seem easier for the time being, you can end up paying a lot more in the long run. Under Fannie Mae’s new guidelines, those struggling with student debt can use the payment information on their credit report to figure out their debt-to-income ratio, or DTI. Those that have income-driven repayment plans can now calculate their DTI using the payment information from that plan.
Debts Being Paid by Others
Another piece of good news for those with student debt is if someone else is making payments on that debt–like a parent, employer, or other benefactor–those payments can be excluded from the calculation of the mortgage. Oftentimes, parents cover the student loan payments for their children until the student is financially able to take on the payments themselves. On top of that, more and more employers are adding student loan repayment to the benefits they offer their employees. Under the old policy, the debt-to-income calculation did not take into account the possibility of student debt being paid off by a parent, employer, or other third party. However, under these new guidelines, debt payments made by someone else can be excluded from their calculated mortgage. All this requires is official documentation that a third party is making payments to the student debt.
This third policy change by Fannie Mae introduces a cash-out refinance option for those with student loans. This is a very beneficial and cost-effective alternative, especially to those with private student loans rather than federal ones. This feature now gives people struggling with student debt the option of using home equity to pay off student loans. A cash-out refinance option has always been available for those with home equity, but previously if the cash-out amount was higher than the amount of the mortgage, it would often come with more fees or a higher interest rate. With this new policy, the interest rate being used to pay off student debt will be the same as the mortgage. Since most mortgage interest rates are cheaper than rates on private student loans, this will ease the burden for people with student debt. This change does, however, come with a few rules. In order to be eligible for the payoff, at least one student loan must be paid in full directly to the loan holder at the time of the transaction. This transaction can also only be used for student loans that the mortgage borrower is personally legally responsible for.
When looking into homeownership and mortgages, it is important for everyone to do their homework–especially those with outstanding student loans. It is important to keep in mind the best option for both the present day and in the long term. Obtaining a mortgage is still a challenge for those with student loans, but that does not mean it is not an option. Many people today are struggling with student debt, but that should not stop them from becoming homeowners.
Eric Lawrence Frazier, MBA
President and CEO
NMLS #461807 CalBRE #01143484
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