Zamani & Scott

Student Loan Debt Solutions

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The following post was written by Margie Hofberg of Residential Mortgage Center, Inc.

Fannie has implemented some new policies that will make it easier for those owing student loan debt to qualify for a mortgage.  I’m sure most of you are aware through media reports or other sources that student loan debt is a significant issue for many graduates these days.  In fact, a study just completed by the Federal Reserve Bank of New York found that 44 million Americans have student loan debt, and 7 in 10 graduates in 2015 have debt averaging $34,000.  And these figures exclude for-profit institutions.  Needless to say, this debt seriously impairs the ability of these graduates to buy a home, or to refinance an existing mortgage, for example, to take advantage of favorable interest rates.

There are three new policies – first, Fannie will offer lower cost cashout refinances (by about 1/8 to 1/4 percent in interest rate) if at least one student loan is paid off with the proceeds; in other words, Fannie will price the loan as a non-cashout transaction, which has a lower rate than a cashout loan.

Second, for student loans in payment status, Fannie will accept the actual payment amount rather than imputing a monthly payment of 1% of the loan balance.  The imputed payment usually results in a debt ratio far in excess of that required to qualify for the mortgage.

Finally, if the student loan payments are being made by others (think parents), and a 12 month history can be documented, Fannie will exclude the monthly student loan payment from the borrower’s debt ratio, thereby allowing many more graduates to qualify for a mortgage loan.  As an example, suppose an applicant’s monthly salary is $5,000, and they have fixed monthly debt including a student loan payment of $2,500.  The debt ratio (called DTI) is therefore 50%, which would not qualify for the new mortgage.  However, if the parents have been paying the $500 per month student loan for 12-plus months, it can be excluded, resulting in a DTI of 40% which would qualify.