Here’s some good news for homebuyers and owners burdened with costly student loan debts: Mortgage investor Fannie Mae has just made sweeping rule changes that should make it easier for you to purchase a first home or do a “cash-out” refinancing to pay off your student debt.
Fannie’s new policies could be game changers for large numbers of consumers. Roughly 43 million Americans are carrying student debt — $1.4 trillion nationwide — according to industry estimates. These not only are a drag on borrowers’ ability to save money, but are a key reason why so many young, would-be homebuyers remain renters — or are camped out in their parents’ homes.
There are three big changes that Fannie has made that could affect you:
• If you’re one of the 5-million-plus borrowers who participate in federal reduced-payment plans on your student loan, your actual monthly payments, as reported to the credit bureaus, will count toward your debt-to-income (DTI) ratio calculations. If your payments were originally supposed to be $500 a month but you’ve had them reduced to $100 through an “income-based repayment” plan, only the $100 will be added to your monthly debts for DTI purposes. Previously lenders were required to factor in 1 percent of your student loan balance as your monthly payment on the student loan, even though you were actually paying a fraction of that. As a result, many borrowers’ debt ratios were pushed beyond most lenders’ underwriting limits.
• For an estimated 8.5 million American home owners who are still carrying student debts, Fannie has lowered the costs of a “cash out” refinancing, provided the extra cash you pull out from your equity is used to retire your student debt. Among the potential beneficiaries: parents participating in “parent plus” programs that help pay off their kids’ student debts, and parents who have co-signed for their children’s student loans. Fannie is eliminating the usual extra fee it charges for cash-outs, as long as the funds that borrowers withdraw pay off student loan debts.
