How Fannie Mae is Making It Easier to Obtain a Mortgage with Student Loan Debt
Over the past decade, Americans have seen significant increases in student loan debt—so much so, that 71% cite it as a reason why they’ve postponed buying a home. The payments brought on by these loans impact a borrower’s debt-to-income ratio, a factor mortgage lenders consider when evaluating an individual’s ability to obtain a mortgage.
If you are a recent (or not so recent) college graduate looking to buy a house, and have found that student loan debt is holding you back, you’ll be happy to know that recent modifications to federal guidelines are making it easier for individuals with student loan debt to qualify for mortgage financing.
Last month, Fannie Mae announced new changes to its underwriting requirements that will help more people with student loan debt qualify for a home loan. Keep reading to find out what these new changes mean for you.
Student Loan Payment Calculation Changes
Previously, lenders had to take 1% of an outstanding student loan balance to calculate the monthly student loan payment. This meant that a mortgage applicant with $60,000 in student loans was considered to be paying $600 a month.
This old way of calculating student loan payments distorted the debt-to-income ratio for many applicants, affecting their ability to qualify for a mortgage loan. It failed to take into account income-driven repayment plans that reduced many people’s monthly student loan payment.
Fannie Mae’s new student loan changes make it so that lenders can accept whatever student loan payment information is included on the borrower’s credit report. This makes it more likely for borrowers with student loan debt to qualify for a mortgage loan, as it enables lenders to use accurate figures to calculate the debt-to-income ratio.
In the chance that student loan payment details are not included on a borrower’s credit report, Fannie Mae gives lenders the option to use either 1% of the outstanding student loan balance, or a calculated payment that will fully amortize the loan based on the documented loan repayment terms.
Student Loan Debt Paid by Others
It isn’t unusual to hear people say third parties, such as their parents or employers, are making their student loan payments for them. Historically, this was not factored into the debt-to-income ratio calculation required for mortgages.
With Fannie Mae’s student loan changes, lenders can now take into consideration student loans that are paid by a third party. This widens borrower eligibility to qualify for a home loan by excluding non-mortgage debts (such as student loan payments) from the debt-to-income ratio, provided that borrowers can present documentation showing the debt has been satisfactorily paid by another party for the past 12 months.
Student Loan Cash-Out Refinance
Cash-out refinances to pay off student loans have always been available to homeowners with equity, but the option often came with fees and high interest rates.
Under Fannie Mae’s new rules, homeowners now have a more cost-effective way to use equity to pay off one or more of their student loans through a refinance transaction, while potentially reducing their monthly mortgage payment. The stipulation is that at least one student loan for which the borrower is personally obligated must be paid in full as part of the transaction, with loan proceeds going directly to the student loan servicer at closing.
If you’re a hopeful homebuyer or a current homeowner with student loan debt, we’d be happy to put you in touch with an expert lending professional on our team who can help you understand your options. Simply send us a message and we’ll put you in touch.