Here’s some good news for home buyers 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 home buyers 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.
— If you have non-mortgage debts that are being paid for by someone else — say your parents pay your monthly credit card balances — these no longer will be included in your DTI computation, provided the payments have been made steadily for 12 months. This should improve the debt ratios of young buyers who are still getting a little help on their cash flows from Mom and Dad.
Jerry Kaplan, senior vice president for Cherry Creek Mortgage, a lender based in the Denver area, sees Fannie’s student loan changes as “a huge deal.” It’s “not uncommon,” he told me, to see loan applications showing $50,000 to $100,000 or more in unpaid student loan balances, and Fannie’s previous rules often made it difficult for them to get approved.
John Meussner, a loan officer at Mason McDuffie Mortgage in Orange County, California, described the negative impacts of Fannie’s previous method of treating student loans with income-based repayment amounts. His firm recently received an application from a borrower — a parent with $100,000 in student loan debts she took out for her children’s educations — who could not be approved for a refi under the old rules. Though she was actually paying just $100 a month, Fannie’s mandatory 1 percent calculation rule required Meussner to list her debt at $1,000 a month. Now, since the $100 in payments are on her credit reports, only $100 will go into her DTI calculation and she will likely qualify for the loan she sought.
“This is a step toward common sense,” said Meussner in an interview.
Not every lender is quite as enthusiastic about the changes, however. Steve Stamets, senior loan officer with Mortgage Link Inc. in Rockville, Maryland, says he has “mixed feelings.” On the one hand, he has applicants with heavy student debts who couldn’t be approved under the old rules and now will qualify under the new ones. But he worries about the sheer size of some of these student debts. If borrowers have trouble paying down these loans or making full payments, they could end up in default on their home mortgages.
For its part, Fannie Mae says it expects mortgages originated using the new guidelines to have low default rates. Borrowers must still meet Fannie’s regular credit score and other underwriting criteria, which some industry critics say are too stringent, not too lax.
Bottom line: Check out the pros and cons with lenders. You just might be a fit.