Programs expand mortgage eligibility for those burdened by student debt
Last week, Fannie Mae unveiled three new programs to help aid current homeowners and future homebuyers who are blocked from eligibility and financing by the burden of student debt.
Fannie Mae first announced an expansion of its cash-out refinance program with SoFi. The GSE also announced the implementation of two other programs to help widen eligibility for borrowers. One helps potential borrowers whose debt is paid by others. The third solution allows lenders to accept student loan payment information on credit reports, making it easier for student debt holders to qualify for a loan.
So, how do these new programs help current homeowners and future homebuyers who are bogged down by student debt when financing a home? Here’s an outline of what each new solution does and how it can help.
Student loan cash-out refinance
This option offers homeowners the flexibility to pay off high interest rate student debt while potentially refinancing to a lower mortgage interest rate.
Johnathan Lawless, Fannie Mae’s director of consumer outreach, said this option is ideal for parents who may have home equity to cash in on because it could be used to pay for their child’s education debt. But Lawless did warn that refinancing may negate any benefits the borrower receives in the original loan contract, such as the ability to enter into forbearance or an income-based repayment plan.
Debt paid by others
Fannie Mae has widened borrower eligibility by excluding from the borrower’s debt-to-income ratio any non-mortgage debt, such as credit cards, auto loans, and student loans, that are paid by someone else.
Student debt payment calculation
Fannie Mae has changed how student debt is calculated when applying for a mortgage, making it more likely for borrowers with student debt to qualify for a loan by enabling lenders to accept student loan payment information on credit reports.
Lawless explained that if you’re on an income-based repayment plan, the lower payments will now count toward your debt-to-income ratio to help determine mortgage eligibility.
“The day we announced this, I received a call from a lender who had a borrower on one of these plans and their monthly payment was $100, but because of the policy on how to put the debt into the ratio, they were actually using $600,” Lawless said. “We announced the change and they went back into the application and updated it to $100 and it went from not being approved to being approved.”
Betsy Mayotte, director of consumer outreach and compliance for American Student Assistance, an organization aimed at helping students and universities overcome student debt, said the changes are exciting and reasonable.
“This could be a great option for Parent PLUS and Grad PLUS loans,” she said.
Mayotte stressed that borrowers should become more educated about their options when exploring how to pay for student debt.
“People get so caught up in interest rates,” Mayotte explained. “They get tunnel vision and may not see what they’re giving up. Federal loans have discharge options if something terrible happens, such as disability and death.”
Mayotte encouraged borrowers to look into any program with their eyes wide open and to think about the long-term implications, cautioning that “if you used home equity to pay off $60,000 in student loans, that could be a $600 payment a month and if you can’t afford that, you could lose your house.”