You earned a college degree because you wanted to improve your life. You wanted to increase your chances of working in a fulfilling, rewarding, and financially-secure career, one where you could flourish and have a high-quality income.
For good reason, you fully expected that a college degree would increase your chances of home ownership; after all, with a college degree, you should have the income to easily pay for your mortgage.
But when you apply for a loan, you discover a hard fact: your student loans are keeping you from securing a mortgage. Lenders look at your thousands of dollars in student loan debt and red lights flash; you’re now a default risk.
Suddenly, the money you borrowed to improve your life is keeping you from improving you life!
Fortunately, Fannie Mae, the government mortgage organization behind a large portion of loans, has recognized the problem and made changes to their policy. These changes are designed to help aspiring homeowners secure an affordable mortgage, even when they have a pile of student debt.
With these changes, you just might get the mortgage you deserve!
Have a Student Loan? What You Need to Know About a Fannie Mae Cash-Out Refinance
What is a Cash Out Refinance?
The new guidelines center around an important part of tackling the student-loan/mortgage application issue called “cash out refinancing.”
Cash out refinancing essentially works like this: if you have a student loan, part of your mortgage loan goes towards paying off the student loan and closing that account, simplifying your debt ratio.
Let’s say you have $40,000 in student loans and, for the home you wish to purchase, you need to take a mortgage loan of $150,000. With cash out refinancing, you essentially get the amount you need for the home and the amount you need to pay off the student loan. In this case, you would take out a loan of $190,000, with $40,000 going toward the loans.
The top advantage, and the one most commonly cited by Fannie Mae and other organizations, is that you can get a lower interest rate for the total amount of money you owe. Essentially, you pay off the student loan and have one loan with a lower interest rate, which can mean long-term savings for you and your family.
New Requirements with Cash-Out Refinancing
Cash out refinancing from Fannie Mae has been around for a while, so what’s new about the recent changes?
First of all, there are some restrictions and guidelines. When using the cash out refinancing option, at least one student loan must be paid off completely, and the loan proceeds must go directly to the student loan servicer who is responsible for the loan once everything is closed.
Also, the funds from the loan can only go to student loans which the borrower is directly responsible and personally obligated. In other words, you can’t use this refinancing option to pay off loans for your friends or relatives unless your name is on the loan. This is important for parents, as they can’t refinance to pay off a child’s loan unless they are also listed on the loan.
Student loan debt must also be paid in full, according to the requirements. Partial payments (half of the student loan, for example) are not allowed.
What is Allowed?
The guide from Fannie Mae is not entirely restrictive, and it does lay out a few things you can do, not just what you can’t. For example, the program allows you to exclude non-mortgage debt that is paid by others from your debt-to-income ratio. For example, let’s say you recently graduated and drive a car with debt, totaling $10,000, that is paid by your parents. Without the exclusion, your debt-to-income ratio would have to include the $10,000 car loan. However, if you have proper documentation showing your parents make the payments (which should be easy to acquire), you can leave this amount off your total debt. By reducing debt that you have to claim, you are more likely to qualify for a loan.
There is also a clause that allows the documentation of payments that are made on credit cards. This makes it more likely for potential borrowers to qualify because lenders can accept student loan payment information on credit cards as part of their process.
Requirements for the Student Loan Cash Out Refinance
Let’s now go over the basic requirements so you understand how to proceed. First of all, the loan must be underwritten in Desktop Underwriter, an automated program that is used by loan originators to qualify borrowers for Fannie Mae loans. This shouldn’t affect potential borrowers much, but the lender will need to confirm that the loan meets the requirements.
Also, the proceeds of the loan must be paid directly to the student loan servicer at the time of closing the loan, and at least one borrower must be listed on the loan being paid off.
There is a special addition to the program. An existing first mortgage loan or an existing lot lien can be paid off with the loan. However, the owner will need to meet specific requirements.
The Bottom Line
So what is the final result of all this? What does Fannie Mae hope to accomplish? Essentially, they hope to make the eligibility terms simpler and reduce fees, which should provide additional options to borrowers with student debt.
There are restrictions on loan-to-value, which a dedicated professional can help you understand, but in the end you should be more likely to qualify for a loan, even if you have student debt. Even high-balance loans are eligible, so no matter how much student debt you have, be sure to talk with a professional to see if you qualify.
Learn More about Your Mortgage Options
Getting an affordable mortgage can be tricky, especially if you have a large amount of student debt.
Contact our team today to learn more about your borrowing options. With years of experience and a dedication to quality service, we can explain your options and help you get the right loan for your future!
A very responsible and experienced professional with his highly effective team
I really enjoyed working with Chad Baker and the rest of the team. This was our first time buying a home in California and we started with unnecessary assumptions based on our previous experience as home-owners in a different state. Chad and his team were available throughout the whole process, explaining the state differences, answering all our phone calls and emails quickly and directly, and providing detailed weekly status reports so that all parties including agents knew exactly where we were in the process. Chad was very experienced and provided customized loan products for us to consider, which definitely facilitated our transaction. I recommend the Chad Baker team! ”
Everything about our transaction with this lender was perfectly explained to us, easy to do, and they were able to help us get our loan closed ahead of schedule. It was a perfect 10 and we couldn’t have been happier with the whole thing
“Chad, it was a pleasure working with you. Your loan was smooth, speedy, and we were kept well informed. I will make sure to prioritize offers where you are the loan officer as I know they run smoothly.”