New Fannie Mae Rules Towards Student Debt

Many student loan borrowers – 71 percent, in a recent survey – say student loans are one reason they’ve delayed buying a home. But that could soon be changing. Recently, Fannie Mae, one of the biggest secondary markets for home loans in the U.S., announced three significant changes to its underwriting requirements pertaining to consumers with student loans. Two of these changes can help borrowers obtain a mortgage, while a third change can help those with home equity reduce student loan debt.
Income-Driven Repayment Plans
Before, if a borrower was on an income-driven repayment plan, the lender was instructed to use 1% of the balance in place of the borrower’s actual payment. But now lenders using Fannie Mae underwriting standards can use the existing payment, unless it is zero. The difference between the actual payment and the 1% balance formula can make a several hundred dollar per month difference in the debt load for qualification. Most mortgage lenders require a monthly debt-to-income ratio of no higher than 43-50 percent.
There are a few caveats to this new rule. First, the payment amount must show up on the borrower’s credit report and must be more than zero. If the payment fails those criteria, the lender must use the 1% value. Or, the borrower can then apply for a new income-driven plan plan that pays off the loan in full during the term.
Third-Party Payers
More and more employers are recognizing the value of offering student loan repayment as a benefit to their employees. The new Fannie Mae rules allow the mortgage lender to exclude those payments from the mortgage calculation as long as the borrower can supply documentation that a third party, such as an employer or parent, has satisfactorily made the payments for at least the last 12 months.
Paying Student Loans with Home Equity
New rules will allow borrowers with enough equity in their home to refinance their mortgage to include funds to repay some or all of their student loans.
While a cash-out option has always been available, under the new rules, borrowers will receive the same rate on the amounts used to pay off student loans as for the new mortgage, instead of being charged fees and sometimes higher interest rates for the student loan portions.
At least one loan must be paid in full as part of the transaction. Funds are sent directly to the student loan holder, and you can only use this program to pay loans that you, the mortgage borrower, are personally, legally responsible for.
This last change is probably better news for private student loan borrowers than most federal student loan borrowers. Paying off federal loans in general means losing the lower payment, deferment and discharge options those loans maintain. Do your homework before refinancing.
When qualifying for a mortgage, many Buyers were constricted by the old rules regarding student loans. Now, they have an increased chance to obtain a loan for their dream home!

Posted on July 10, 2017 at 10:30 am
Nancy Low | Category: News

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