Fannie Mae lightens up on Student Loan Mortgage Rules
This Spring, Fannie Mae released big changes to the way they’ll allow mortgage companies to underwrite loan files involving student loans. The student loan mortgage rules will now be more borrower-friendly, and will allow lenders to implement some common sense into underwriting loans for borrowers with substantial student loan debt. Included in the changes
are other common sense approaches to how underwriters can analyze a borrower’s debt burden, commonly referred to as DTI (debt-to-income ratio). The recent release is best described as several small changes with potentially large impacts, opening the doors for more Americans to achieve the dream of home ownership.
Changes to Student Loan Mortgage Rules
Until now, lenders were limited in the ways they could calculate student debt into DTI – either using a payment shown on credit, or a percentage of the outstanding loan balance. While this way of doing things makes some sense in that a payment showing on credit is generally accurate, and using even 1% of a loan balance is a conservative measurement of what people will actually pay, it left a lot of borrowers with unnecessarily large debt burdens on their mortgage applications. For example, someone on income based repayment plans may pay much less than 1% of their loan balance or what is shown on credit. For those with loans in deferment or forbearance their actual payment may be much lower than 1%, but may not be shown on credit during the deferment/forbearance period.
With the new rules, lenders can use a borrower’s actual payment when qualifying them. If they have an income-based repayment schedule, the reduced payment can be used to qualify when properly documented. This will help many recent college grads qualify for a home loans sooner than under the previous rules.
Note: When in deferment or forbearance, a lender must still verify what the payment will be when repayments begin. This can be verified through the credit report or through the student loan lender. If no payment can be verified, the 1% of the balance rule will apply.
Student Loan Mortgage Rules for Cash-Out Refinances
With the recent rise in home prices across the country, cash-out refinance programs have become more popular, and with new student loan mortgage rules, homeowners can refinance and include student loan debt into their new loan without the higher interest rates typically associated with cash-out loans. Under previous guidelines, Fannie Mae required pricing adjustments if borrowers used the equity in their home to withdraw cash or pay off debts, resulting in higher interest rates. Now, if the debt being paid off is a student loan, there is no such adjustment, so borrowers have the ability to wipe out their student loans with no “penalty” to their interest rate.
Note: Under this guideline, at least 1 student loan must be paid off in full with the new cash out refinance. Student loans cannot be partially paid off, and including other types of debt will still result in a pricing adjustment.
Excluding Debts Paid by Others
The recent Fannie Mae changes also addressed a very common problem encountered by mortgage applicants – debt in a borrowers name, but being paid by someone else. In the past, debts paid by another party had to be counted against a loan applicant if the debt was in their name.. Now, if a borrower has a debt and can evidence someone else has paid that debt for 12+ months (on time, of course), the debt can be excluded from a borrower’s DTI. This will be a huge help to parents who are helping their children establish and obtain credit (think: cosigning student loans, or purchasing a vehicle that the child will pay for), and circumstances where one borrower has opened credit to help someone with a less than stellar credit history.
Note: This exclusion only applies to non-mortgage related debts
No Seasoning Required on Previously Listed Property Cash-Out Refinance
Fannie Mae has also changed their rules on withdrawing cash from recently listed properties. In the past, if a property was listed for sale, the owner had to wait 6 months after withdrawing the listing to pull cash out. Now, there is no waiting period. Immediately after removing a property from the market, a cash-out refinance can be done.
While the changes to student loan mortgage rules and debts paid by others are a big deal in getting more mortgage applicants qualified, there is another plus to take away from these changes. Fannie Mae is loosening requirements and restrictions on mortgage applicants, allowing more people to qualify, and allowing lenders to use common sense to evaluate the repayment ability of applicants. This is a tremendous shift from years of tighter restrictions following the housing crash, and is evidence of a largely improved market place, the return of equity and appreciation to homeowners, and a commitment to helping Americans achieve a big part of their dream – homeownership.
Note: All of the above requirements are guidance from Fannie Mae, not a particular lender. Many lenders have overlays that could prevent using the above guidelines – be sure to work with a lender that underwrites their loans according to Fannie Mae guidance. If you’re curious, yes, Mason Mac is one of those lenders.
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To read more about changes to student loan mortgage rules, please check out the Washington Post announcement in which we were referenced