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Homeowners with student debt can roll it into mortgage
WASHINGTON – Aug. 1, 2017 – Fannie Mae, the large quasi-government agency that sets the guidelines for lenders selling their home loans on the secondary mortgage market, is adopting some new procedures that should make it easier for many borrowers with student debt, and those who cosigned for them, qualify for a home loan. Large student debt is one of the barriers for many young people trying to qualify for a mortgage.
Beginning immediately, Fannie Mae is expanding cash-out refinances that let borrowers use the lower interest rate equity in their home to pay off higher interest rate student debt. The refi program should help not just students who borrowed money for themselves, but also parents who cosigned for them. (Private student loans made by banks and other lenders typically require cosigners.)
While the cash-out refi program will enable many borrowers to trade low interest mortgage debt for higher interest student loans, the program does carry some risk. Student loans are unsecured while mortgages are secured by the home. If the borrower runs into financial difficulty, the home could be at risk.
Also, federal student loans come with protections like flexible repayment options and payment deferment if the borrower runs into financial trouble. Those protections end if the debt is refinanced into a mortgage. Private student loans, however, do not usually have those protections.
Another change allows borrowers applying for a mortgage to exclude debt being paid by others, such as credit cards and student loans being paid by parents or employers, from their application. That change will help give these borrowers a better debt-to-income ratio, some important criteria in a mortgage application, improving their chances of qualifying for a mortgage.
A third change will help borrowers with student loans on a flexible payment plan, which tie monthly payments to income. Previously, Fannie Mae required lenders to use higher monthly loan payments rather than borrowers’ lower flexible payments in determining debt-to-income. Now, lenders can use the lower payments which should help more borrowers qualify for a mortgage.
Many millions of student borrowers are on flexible payment plans. Hopefully, all of these changes will make it easier for young people to get into the housing market.
Copyright © 2017 The Enterprise, Linda Goodspeed. Goodspeed is a long-time real estate writer and author of In and Out of Darkness.
