Sharing is caring!

Due to a recent decision by Fannie Mae, getting approved for a mortgage when you have student loan debt will be a lot less difficult.

Fannie Mae recently announced a few new changes that will help borrowers with student loan debt be eligible for mortgage financing.

For the 44 million American borrowers carrying a total of $1.45 trillion in student loan debt, this is a quality of life changing decision.

Before the change, qualifying for a mortgage was very challenging for recent graduates as well as those one who have had a job two years or more removed from college.

Fannie Mae made the change because many graduates are denied financing because their student loan payments put them over the acceptable debt levels based on their debt-to-income (DTI) ratios.

The DTI is ratio of your income divided by your monthly debt payments. As an example, suppose you’re shopping for a home and your pre-tax income is $6,000 every month and your debts are.

• Credit cards (revolving debt): $250
• Auto loan (installment loan): $500
• Student loans: $750

Their current rent is $1500 and their proposed mortgage payment is $1,750 for the new townhome in Mission Viejo.

This home buyer will likely not qualify for a home because their debt payments are more than 50% of their gross income, and the maximum lenders typically accept is 43%, with some guidelines allowing as much as 50%.

The choices for this buyer now are one of three options, they can  A) Get a lower priced home; B) repay some debt in full, or; C) Continue renting. However, Fannie Mae came up with a brilliant idea to deal with this.

The solution by Fannie Mae is to allow lenders to view student loan payments in other ways.

Change #1: Payment calculation revision

The student loan payment that is shown on the credit report.is what a lender may now use. Prior to this logical switch, lenders were required to use one-percent of the unpaid balance or the amount based on a fully amortized payment. Many college graduates are on an income-driven repayment (IDR) plan like the IBR, ICR, PAYE and REPAYE which is a lower amount than one-percent of the balance..

These plans allow students who obtained a bachelor’s, masters, law or doctoral degree to pay back student loans as it related to their income. In many cases, the interest owed is more than the monthly payment on the income driven plan. This new approach can make a huge difference in qualifying for a home loan.

To illustrate, say an employee earns a salary $5,000 each month and has:

• Payment of $825 on the fully amortized calculation
• Payment of $275 using the income-driven plan

The lower payment amount will help immensely when applying for a home loan.

Change #2: Student debt paid by others

Although the student loan payment is on a mortgage applicant’s credit report it does not mean they are the one who takes care of the payment each month. It is not uncommon for the payment to be paid every month by the parent or somebody else like a close friend or even an employer.

When that happens, lenders are permitted to disregard the debt payment completely. This same rules applies for other debts too;  credit cards, auto loans, and other installment and revolving debt obligations.

All the borrower needs to do is to give the lender documentation that their debt has been paid by someone else without any late payments in the last 12 months. The documentation is usually 12 months of canceled checks from the other party or bank statement showing the debit. The benefit is the payment is removed from the DTI calculations.

Change #3: Refinancing to pay off student loans

One of the most significant changes is how Fannie Mae will now view cash-out rules when it involves student loans.

As a rule, cash-out refinances tend to have higher rates than a refinance without cash-out.

From this point forward, Fannie Mae will not deem a refinance loan as a cash-out transaction if the loan proceeds repay in full at least one student loan entirely.

Borrowers are basically getting the loan at refinance rates that are rate-and-term. This change may save the homeowner tens of thousands of dollars throughout the life of the loan.

Suppose you are an applicant with a 665 middle FICO score and applying for a refinance loan of $485,000 in California or other states 1st Nationwide Mortgage is approved to close loans.

• Prior to 2017 rules: 4.375% cash-out loan with a payment of $2,422 monthly
• New rules: 4.125% student loan cash-out with a payment of $2,351 monthly

This $71 difference per month can add up to thousands over the term of the loan. 71 x 360 payments will equal $25,560.

That’s not all. Your savings are increased by paying off high-interest student loan debt of 5% or higher.

Homeowners must adhere to these three key guidelines to qualify for this refinance cash-out benefit.

• A minimum of one student loan needs to be repaid in full to a zero balance, with cash-out funds transferred directly to the student loan provider.
• Limited to just student loans in the borrower’s name are able to be repaid in full.
• No partial payments of student loans permitted. Must be paid in full.

See if you qualify today by contacting a licensed representative from 1st Nationwide Mortgage