Fannie Mae headquarters, located in Washington D.C.
Finally, some good news for student loan borrowers: New rule changes from Fannie Mae have been introduced. These new rules offer two solutions: one aims to help borrowers purchase a home and the other offers a “cash-out” refinance to pay off their student debt.
With so many young Americans carrying student loan debt—and struggling to pay it off—purchasing a home is a dream that is nearly impossible to achieve for many affected borrowers. Not only is the idea of taking on yet another monthly payment daunting, but those with high debt-to-income ratios couldn’t get approved for a mortgage loan even if they wanted it.
In an effort to help these borrowers, Fannie Mae has made three crucial changes.
Lowering the costs of a “cash out” refinancing option for homeowners, as long as the extra cash pulled from your equity is used to the pay off the homeowner’s or his or her child’s student loan debt.
Debt being paid by a third party (for example, your parents are paying your monthly credit card balances) will no longer be included in your debt-to-income computation as long as the payments have been made steadily for 12 months.
Borrowers with federal reduced-payment plans on their student loan will have their actual monthly payments count toward debt-to-income ratio calculations. In the past, lenders had to factor in 1 percent of the student loan balance as the monthly payment on the student loan, even though a borrower was only paying a fraction of that.
While some lenders might be worried that borrowers with student loan debt might not be able to handle monthly mortgage payments, Fannie Mae is anticipating that the mortgages originated under the new guidelines will have low default rates since applicants must still meet regular credit score and other underwriting criteria.
The issues presented by and underlying causes of the decline in homeownership among graduate borrowers have been addressed by many including Dartmouth Universtiy and the National Association of Realtors.
Additionally, other parties have tried presenting their own solutions such as the Maryland SmartBuy program that is quite similar to the ideas of Fannie Mae. The well-known private lender, SoFi, offered its own program, dubbed the Student Loan Payoff Refi, targeting home-owning student loan borrowers. SoFi, along with many other student loan consolidation companies also offer unsecured student loan refinancing.
At any rate, it is clear that homeownership is down among graduates, and there are plenty of driving factors behind this trend. While presenting mortgage solutions to drive homeownership rates can be effective to some degree, many of the solutions just previously mentioned may not be viable options for all, meaning those who aren't eligible for a mortgage in the first place. At any rate, Fannie Mae's solution attempts to address this by offering a program that addresses mortgage eligibility.
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