Many people wanting to buy a home can afford the monthly payment, but can’t qualify for a mortgage because of student loans. To help solve this problem, Fannie Mae implemented new rules this year that help homebuyers with student loans get a mortgage, and also help homeowners pay off student loans with equity from their home.
Homebuyers with Student Loans Face Trouble Getting a Mortgage
70% of students graduate with student loan debt, adding to the 44 million people in the U.S. who have student loans. Because of student loans, many people are forced to rent, since they cannot qualify for a mortgage to buy a home.
Fannie Mae, therefore, has changed some of its rules to make it easier for people with student loans to qualify for a mortgage, or refinance an existing mortgage.
“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution,” said Jonathan Lawless, Vice President of Customer Solutions, Fannie Mae. “These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”
The solution provided by Fannie Mae involves:
- Student debt payment calculation.
- Student loans paid by third parties can be excluded from the borrower’s debt-to-income ratio in some cases.
- Cash-out refinancing to pay student loans.
Fannie Mae’s Changes Help Homebuyers and Homeowners with Student Loans
There are three ways Fannie Mae’s changes help borrowers with student loans:
Income-Driven Repayment Plans for Student Loans: In the past, borrowers who repaid student loans using an income-driven repayment plan had difficulty qualifying for a mortgage, because lenders were required to use 1% of the balance rather than the actual monthly payment.
Now, with Fannie Mae’s changes, lenders can use the actual monthly payment on student loans, which will make it easier for some borrowers to qualify for a mortgage. Furthermore, for borrowers whose monthly student loan payment is not reflected on their credit report, lenders can either use 1% of the outstanding student loan balance or a calculated payment that will fully amortize the loan based on the repayment terms of the loan.
Third-Party Student Loan Payers: In the past, when a third party (such as an employer or relative) was making the monthly payments on a student loan, lenders had to include the payment in the borrower’s debt-to-income calculation, as if the borrower was personally making the payments. This made it more difficult to qualify for a home loan.
Now, with Fannie Mae’s changes, lenders can exclude these payments when calculating a borrower’s debt-to-income ratio, as long as the borrower can supply documentation that a third party made the payments for at least the last 12 months.
For example, before Fannie’s new rules, John Doe graduated from college with a student loan. He took a job at a company that made the monthly payment on his school loan. After a year, John applied for a home loan, and his employer’s monthly student loan payment was included in his debt-to-income calculation as if he was personally making the payment. As a result, he did not qualify for a home loan.
Now with Fannie’s new rules, in this example, the employer’s payment of the student loan will not be calculated in John’s debt-to-income ratio, and he qualifies for a mortgage.
Paying Student Loans with Home Equity: Fannie’s new rules allow homeowners with equity in their home to do a cash-out refinance of their mortgage to repay student loans. The new rules also make it possible for these cash-out refinance mortgages to have lower interest rates in some cases, compared to cash-out refinancing under the old rules.
But, since the funds from the refinancing are for payment of student loans, at least one student loan must be paid in full, as a result of the cash-out refinancing.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers and homeowners in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients with HARP refinancing to lower their monthly mortgage payments.