In a surprising move, Fannie Mae announced its new programs to make it easier for consumers to qualify to be first time home buyers, or pay off their student loans via a refinance. The new program is called Student Loan Solutions.
This is undoubtedly fantastic news for Americans who hold some of the $1.4 trillion in student loan debt. Effective immediately, Fannie Mae is easing the home loan process with three major changes so that becoming home buyers or reducing student loan debt may become a reality.
Change #1: Student Loan Payment Calculation
Fannie Mae has changed how lenders calculate student loan payments. Whereas before the change, mortgage lenders had to use 1% of the outstanding balance or the fully amortizing repayment amount, now lenders can calculate debt to income ratio (DTI) based on the student loan payment just as it appears in the credit report. This is good news for borrowers on an income-driven repayment (IDR) plan such as PAYE and REPAYE.
Change #2: Student Debt Paid By Others
In the case that a parent or other third party pays the bill, Fannie Mae is disregarding the payment altogether. That applies not only to student loans, but payments for all debts.
The home buyer simply provides documentation that its debt has been paid by another party, on time, for the past 12 months. Then, the lender completely eliminates the payment from DTI calculations. This applies to: student loans, credit cards, auto loans, and most other installment and revolving debt.
Bear in mind, the buyer must be “hit” with any mortgage debt paid by others. Additionally, the rule does not apply at all if the paying party has an interest in the transaction, such as a Realtor or the seller.
Change #3: The New Student Loan Cash-Out Program: Pay Off Education Loans With A Refi
Perhaps the biggest modification of all is Fannie Mae’s rework of cash-out rules regarding student loans. Homeowners may now pay off student loans using equity from their homes at lower rates and easier qualification.
Typically, cash-out refinances are considered higher risk by mortgage lenders and Fannie Mae. According to Fannie Mae’s loan level price adjustment matrix, a lender must charge an extra 1%-2% of the loan amount in fees or more, just because the loan is deemed “cash-out”. Those extra fees usually translate to higher rates.
Now, Fannie Mae does not consider the loan a cash-out transaction if loan proceeds completely pay off at least one student loan. This loan classification has never been seen before — a hybrid between no-cash-out and cash-out financing. Fannie Mae calls it the Student Loan Cash-Out Refinance.
Student Loan Cash-Out Eligibility
Maximum loan to values (LTVs) are equal to LTVs of traditional cash-out loans. To qualify for the Student Loan Cash-Out, homeowners must meet three basic guidelines.
- Student loans must be paid off in full. No partial pay-downs allowed
- At least one student loan must be paid off, with cash-out proceeds sent directly to the student loan provider.
Only the borrower’s student loans may be paid off (not those of another party)