2017 Student Loan Debt Policy Changes

These brand new policy changes make it easier than ever to qualify for a mortgage

Do you dream of being a homeowner, but your student loans have kept you from qualifying for a mortgage?

You’re in luck! Fannie Mae has just made some changes to their underwriting requirements pertaining to student loans. Three important features in this new program will make it easier for potential home buyers with student debt to obtain a home loan, or to refinance by using home equity to pay off these student loans.

student loan buying a home

If your credit is acceptable, the first thing a lender will look at is your debt-to- income ratio (otherwise known as “DTI” or the percentage of your debt in comparison to your pre-taxed income). Your maximum DTI typically cannot be more than 45 percent, including your mortgage payment. Prior to Fannie Mae’s changes, your student debt would push your DTI (allowed percentage of debt you have compared to your income) well above the allowed figure. This happened because lenders had been required to use a payment that would pay off the student debt at the end of the term, or 1% of the balance of the loan, even if the ACTUAL payment is only a fraction of this amount.

Here are the ways Fannie Mae has made things better for home buyers with student loans:

  1. If you have an existing income-driven student loan payment plan where a monthly payment is determined based on income, you can use the reduced payment that is reported on your credit report (FHA does not follow this guideline yet, but Freddie Mac does). The key is, the payment must show up on your credit report, and the amount must be more than $0. If these criteria are not met, a lender will still have to use the 1% Rule. You do also have the option to apply for a new income-driven plan to overwrite your current one if need be. If you are not sure what your credit report has listed as your debt, or if you will need to apply for a new student loan plan, begin the preparation process with your chosen lender early so that you have plenty of time to correct issues if necessary.
  2. If your parents, your employer, or anyone else pays for a monthly debt for you, Fannie Mae will disregard these payments, and not include them in your DTI. This will apply to your student loans, credit cards, vehicle loans, or any other installment debt. Simply provide proof that someone other than you has made these payments for at least the past 12 months.
  3. A borrower now has lower costs when paying off student loans with a home equity loan or cash-out refinancing. While this has always been an option, it typically came with high fees and high interest rates. Now, borrowers receive the same rate on the amounts used to pay off student loans that is given on the new mortgage. Fannie Mae is also eliminating the extra fees that go along with a cash-out, as long as these funds are going towards the student loans. To qualify, at least one student loan must be paid off in full and sent directly to the loan holder, and the loan must belong to the borrower. That’s it!
  4. can I buy a home if I have student loans

    Like anything else, research all your options before making decisions, because some federal student loans may have lower interest rates than a mortgage loan, but in a lot of cases, huge savings will be seen by paying off high-interest student loans with a home equity loan.

    So if you’ve been turned down for a home loan or a refinance in the past because of your student debt, now’s the time to try again! Chances are, if you can relate to any of these changes, you may find yourself eligible for a mortgage now.. This, along with the fact that loan rates are still low, makes this the perfect time to take a closer look at home loans, even with student loan debt. If you’d like personal expert guidance with this new program, please feel free to connect with one of our friendly agents for more advice.

    Want more homebuying advice? Nestiny is a great place for homebuyer education and to help you gauge how ready you are to buy a home. Journey Homeward allows you to enter all your wants and needs while the True Affordability Tool will break down your budget, showing what you can comfortably afford. You will also receive a Ready Report that will give you a vital head start in the home buying journey, saving you valuable time and money.

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