Fannie Mae has unveiled three big changes to how conventional loans are underwritten via Desktop Underwriter® Version 10.1. These new policies are meant to bring homeownership closer to borrowers with student loans or at least, reduce their student debt via a refinance.
“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take on a mortgage, and we want to be a part of the solution,” according to Fannie Mae’s Vice President for Customer Solutions, Jonathan Lawless in an accompanying public statement.
Students loans are a nationwide burden for $1.34 trillion, trailing behind mortgages, auto loans, and credit cards, according to the New York Fed’s Center for Microeconomic Data. While it’s possible for student loans to be canceled or forgiven in the case of federal-backed ones, it’s highly unlikely for most student loans to be wiped out.
The impact of carrying student loan balances is a higher debt-to-income ratio that makes it generally harder to qualify for a mortgage. And this problem is shared by all, fresh college graduates, millennials, and their parents.
Against this backdrop, Fannie Mae has launched innovative solutions designed to help out borrowers with existing student loans qualify for home loans. [sc_content_link label=”Learn more about how these recent Fannie Mae rules can help you get a mortgage.”]
Fannie Mae Rolls Out Student Loan Solutions
Fannie Mae’s latest DU® contains its previous announcements in alignment with Selling Guide that governs how conventional loans to be sold to Fannie Mae are to be made.
Among its previously announced policies are student loan solutions which center on:
- Student Loan Payment Calculation
- Debts Paid by Others
- Student Loan Cash-out Refinance
Student Loan Payment Calculation
Fannie Mae introduced a simplified method for lenders to calculate student loan payments for qualifying purposes.
Under Fannie Mae’s rule, lenders can accept student loan payments, whichever is lower of (i) what’s reflected on the credit report, (ii) 1% of outstanding loan balance, or (iii) a fully amortizing payment based on a documented loan repayment plan.
For example, if one is enrolled in an Income-Based Repayment Plan and has an adjusted monthly student loan payment of $0, he/she can use it to qualify for a mortgage. This payment must be reflected on the credit report and documented for the lender to verify.
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Debt Paid by Others
Student loans will no longer be an issue for debt-to-income ratios if they are being paid by others. This is according to Fannie Mae who allows for non-mortgage debts like student loans to be excluded from the calculation of DTI ratios if they are being paid for the past 12 months by parents or another party other than the borrower.
The payments must be properly documented, e.g. canceled checks for 12 months. It’s interesting to note that this rule applies to other non-mortgage installment loans such as car loans, credit cards, and alimony payments.
Student Loan Cash-Out Refinance
Fannie Mae offers a student loan cash-out refinance that allows borrowers to use home equity to pay off one or more of their existing student debts.
An option available to DU® loans only, this comes with simpler eligibility terms and reduced fees. By refinancing, one pays off a high-rate debt such as student loans and gets a lower mortgage rate at the same time.
The maximum loan-to-value ratios for a student loan cash-out refinance are the same as that of Fannie Mae’s standard cash-out refinance. A borrower can receive a cash back of up to $2,000 or 2% of the loan amount, whichever is lower.
Moreover, the loan-level price adjustment (LLPA) that applies to cash-out refinance transactions will be waived when all requirements have been met.
Flexible mortgage guidelines such as Fannie Mae’s help student loan borrowers buy a home or refinance, a relief from the so-called student debt burden that has been felt by so many.