Student loan debt has made it difficult for many young Americans to enter the housing market. A recent survey from the National Association of Realtors found that 71% of student loan borrowers cited their student loan burden as a reason to delay buying a home.
The student loan plight may be a major factor in the housing market struggling to gain momentum, and these loans certainly affect the debtors directly. Jocelyn Paonita, Founder of The Scholarship System, describes the issue this way: "College debt has such a crippling impact for the rest of someone's life because you're not able to take advantage of opportunities right from the beginning."
Home mortgage backer Fannie Mae recently announced new rules that may help relieve that impact. Fannie Mae introduced three changes to its underwriting rules that may help those struggling with student loan debt to enter the housing market. The change will also allow the estimated 8.5 million student loan debtors that already have homes to reduce their overall debt burden.
Two of the changes relate to the calculation of the debt-to-income ratio (DTI), an important threshold in establishing loan qualification. To qualify for a mortgage loan, your monthly DTI ratio should generally be at or below the 43% to 50% range. Fannie Mae has altered two common sticking points for student loan debtors that lowers the DTI and makes it more likely that debtors can reach the loan qualification threshold.
The first change involves income-driven repayment plans – programs that allow reduced payments on student loans in proportion to the debtor's income. Because the payment can vary as part of the plan renewal, lenders were instructed to use a set 1% of the student loan balance instead of the lower payment amount when calculating DTI – a difference that can easily push calculated debt levels above the DTI threshold given significant student loan balances.
Under the new rules, the existing lower payment amount may now be used for calculating DTI values as long as the payments show up on the borrower's credit report and are above zero. It may take a month or two after a payment plan is established for that plan to show up on a credit report, so make sure that you can verify your lower payment before attempting to take advantage of this new rule. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
The second change regards third-party payment of student loans. Whenever a third party (such as an employer or a parent) is regularly making the student loan payments on behalf of the student, the student loan debt has been historically included in the borrower's debt-to-income ratio even though the debt is being regularly paid by others. Fannie Mae now allows mortgage lenders to exclude those debts from the DTI as long as there is documentation that the third party has made adequate payments for at least one year.
For those who have the combined burden of homeownership and student debt, Fannie Mae has changed the rules to make cash-out refinancing a more economical option. If you have enough equity in your home to pull out extra cash and apply it toward paying off your student loan debt, Fannie Mae has eliminated fees associated with the cash amount above the mortgage value and ensured that the excess is not assessed at a higher interest rate than the mortgage. Not all student loans must be paid, but at least one student loan must be paid off in full as part of the transaction.
It's not obvious that a cash-out refinancing would be preferable, because it depends on the terms and type of your student loan. The interest rate on your refinancing may not be preferable to the rate of your student loan, especially federal Perkins or Stafford loans. You will also lose the potential advantages associated with a federal loan, such as deferment options. Use online calculators to run numbers and verify whether a cash-out refinance makes sense for you. MoneyTips is happy to help you get free refinance quotes from top lenders.
Fannie Mae is doing its part to help ease student loan and housing burdens simultaneously. If their rule changes can help you meet your goals, why not take advantage?