Are you among the 71% of student loan borrowers who say student debt is a major reason they’ve put off buying a home?
We’ve got great news: New loan programs will allow many potential home buyers who have been unable to purchase because of student debt, buy their first home!
Late last month, Fannie Mae (a publicly owned government-sponsored corporation that purchases mortgages from lenders) introduced new policies that offer some long-needed help to consumers with student debt to get qualified for mortgage loans.
Two of the changes can help borrowers qualify for a mortgage while a third policy helps those with home equity reduce their student debt. These changes include:
1. Debt Paid by Others
Fannie Mae has expanded who may qualify for a loan by excluding any non-mortgage debt when calculating your debt-to-income ratio.
Do you have non-mortgage debts that are being paid by someone else? They’ll no longer be calculated as debt when you apply for a mortgage, as the payments have been made steadily for 12 months.
This change also applies to credit cards, car loans, and most other types of debt that’s paid by someone else.
2. Student Debt Payment Calculation
Fannie Mae has changed how student debt is calculated when you apply for a mortgage.
Before this change, if you were using an income-driven repayment plan for your student debt, your lender approving the mortgage couldn’t use that lower payment when calculating your debt-to-income ratio. This is because those payments could change each year as your income fluctuated or other financial situations fluctuated. Since most mortgage lenders require a monthly debt-to-income ratio of no higher than 43-50 percent, many potential homebuyers were left out in the cold.
Now, lenders using Fannie Mae underwriting standards can use your payment when calculating your debt-to-income ration, unless it is zero.
Keep in mind that credit reports can take a month or more to display activity, and that’s where your lender will be looking to find your student debt monthly payment. If you’re planning on applying for a mortgage, get your student debt payment plan in place at least a few months before beginning the application process. You’ll be able to confirm the payments are reflected on your credit report in plenty of time.
3. A Student Loan Cash-Out Refinance
If you’re already a homeowner, you now have the flexibility to pay off high interest rate student debt with the option of refinancing to a lower mortgage interest rate.
Homeowners can refinance their existing mortgage with a brand-new “cash out” option. This uses that equity to pay off student loan balances at a lower interest rate.
Normally when you take cash out of your home, the rate associated with that transaction is much higher than with a standard refinance. With this new change, however, if you use it to pay down student debt the additional fees that would usually be associated with a traditional refinance are waived completely.
This change has the potential to help an estimated 8.5 million American homeowners who are currently saddled with student debt. In many cases, parents will benefit, too, especially if they’re participating in “parent plus” programs that help pay off their children’s student debt, or if they’ve co-signed for their children’s student loans.
A Bright Future
The future looks bright for homeowners & future homeowners with student debt.
According to Fannie Mae, mortgages that are made possible through these new changes are expected to have low default rates. As a borrower, you still must still meet Fannie Mae’s regular credit-score and other underwriting criteria.
If you have a solid income and stable job, it’s worth checking out the pros and cons with lenders – you might find you’re a perfect fit, and the time has finally come for you to own your first home.