Changes with Fannie Mae makes it easier for borrowers with student loans to get a mortgage. So in this video, Mary breaks down these changes, and explains how student loan debt is now calculated in your debt-to-income ratio.
Learn about these changes, and what this could mean for you when applying for a mortgage.
00:01 Mary Catchur: Hello. I’m Mary Catchur. I’m the owner of Marimark Mortgage. I want to talk to you today a little bit about student loans, and how they can affect the loan process when you’re buying a home. A lot of people come out of college, of course, with some student loan debt, and then, oftentimes, one of the first things they want to do is get established in their career and purchase a home. So how does this student debt affect you? Well, back a few years ago, FHA didn’t actually count the student loans into your debt-to-income ratio, if they were in a forbearance or a deferral state. So if your credit report showed that they were deferred, and if it was at least a year out, then they actually wouldn’t count any payment against you. Well, that changed for FHA a few years ago, and it’s always been a little bit different for conventional loans as well. Now FHA and conventional are both pretty similar, in that they will count this debt, even if it’s in a deferred state.
01:00 MC: So how do they determine the payment amount? Well, first, we’re gonna look at the credit report, and if there’s a payment amount on the credit report, that’s typically what we’ll go with. If there is no payment amount, then we have a couple of different choices. One of them, which is the least desirable, is the general rule is we want to take 1% of the balance, and that’s the payment amount that’s going to appear in your debt-to-income ratio. A lot of people have a lot of student debt and that 1% can end up being a really big number, and not allow you to go forward with purchasing a home.
01:32 MC: So we do have another option. Because one of the things that we’re seeing happen a lot lately is people are able to get a little bit of a discount on that payment upfront, while they’re just starting their careers. So they’re able to do what’s called an income based assessment with their student loan carrier, and they’re able to say, “Okay, we know that now you’re making less income than you will in the future, so we’re going to have your monthly payments mirror that scenario,” and they’re going to be low upfront and then they’ll gradually increase as you’re more settled in your career.
02:03 MC: Fannie Mae has now said that they will allow these lower payments on the income based credit program. So if your credit report shows, in some cases I’ve seen them, where they actually show these low payments. They can be as little as zero or just $2 to $3 a month sometimes, is all that’s in there. That’s the number we’re going to use. If it doesn’t show a payment amount, then I’ve had many of our borrowers just contact their student loan servicer and ask them to give them a detail of those existing student loans and what those payment arrangements are going to be. And again, Fannie Mae has been allowing those, even if they’re zero upfront. So that’s great for borrowers with some student debt, that’s really gonna help them qualify.
02:47 MC: Another interesting thing that’s going on with student loans is there’s a new program called a cash-out student loan refinance. Which, typically, a cash-out refinance is when you pay off your existing mortgage but you also take some additional cash out of the equity in your home, usually to pay down bills or make home improvements. In this case, what they’re saying is, “We’re going to do a student loan cash-out refinance, where you pay off your existing loan and maybe you pay off your student debts and roll those into your new loan.” Typically, a cash-out refinance is gonna be a little bit higher interest rate, but under this new student loan cash-out refinance, they’re actually going to do it at the same rate that would be just a rate and term refinance when you’re just paying off your mortgage. So that’s another big advantage to home buyers that are carrying some student loan debt. And you may want to consider getting a cash-out refinance to cover those student loans and roll them into your mortgage, depending on how much interest you’re currently paying on them and what your loan terms are. That’s something your loan originator could help you to assess.
03:55 MC: If you have any questions on these student loan programs, feel free to give us a call at 813-910-8020, or look us up on the web marimarkmortgage.com. Thank you.