Recently there was some great news announced for those who are or will be in the market to buy a home soon. Fannie Mae has just made a huge policy change that will make it easier to purchase a home or do a “cash out” refinancing to pay off your student debt.
The new policies could be game changers for the roughly 43 million Americans who are carrying student debt. Student loan debt are a key reason why so many would-be home buyers remain renters and aren’t able to save adequately.
There are three big changes that Fannie has made that could affect you:
- If you’re one of the 5 million-plus borrowers who participate in federal reduced-payment plans on your student loan, your actual monthly payments, as reported to the credit bureaus, will count toward your debt-to-income (DTI) ratio calculations. If your payments were originally supposed to be $500 a month but you’ve had them reduced to $100 through an “income-based repayment” plan, only the $100 will be added to your monthly debts for DTI purposes. Previously, lenders were required to factor in 1% of your student loan balance as your monthly payment on the student loan, even though you were actually paying a fraction of that. As a result, many borrowers’ debt ratios were pushed beyond most lenders’ underwriting limits.
- For an estimated 8.5 million American homeowners who are still carrying student debt, Fannie has lowered the costs of a “cash out” refinancing, provided the extra cash you pull out from your equity is used to retire your student debt. Among the potential beneficiaries: parents participating in “parent plus” programs that help pay off their kids’ student debts, and parents who have co-signed for their children’s student loans. Fannie is eliminating the usual extra fee it charges for cash-outs, as long as the funds that borrowers withdraw pay off student loan debts.
- If you have nonmortgage debts that are being paid for by someone else — say your parents pay your monthly credit card balances — these no longer will be included in your DTI computation, provided the payments have been made steadily for 12 months. This should improve the debt ratios of young buyers who are still getting a little help on their cash flows from Mom and Dad.
For its part, Fannie Mae says borrowers must still meet Fannie’s regular credit score and other underwriting criteria, which some industry critics say are too stringent, not too lax.
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