Generations of people saddled with excessive student loans have complained about the impossibility of buying a house with student loans, as excessive debt is the biggest barrier to entry for getting approval on a mortgage application, but there’s a silver lining for 2017.
Fortunately, Fannie Mae just enacted some serious student loan mortgage changes that are likely to make far more Americans eligible to realize the American Dream: Home Ownership.
What’s the deal with these changes? In a nutshell, there are a couple differences in the way that home owners and prospective home owners will be able to deal with their outstanding student loans, each of which makes it far more likely that they can get approved for a new home loan.
What Changes Did Fannie Mae Make?
Several changes are being made in the way that Fannie Mae does their business, each of which is supposed to help make it easier for people to take out new loans, or refinance existing loans, when they’ve already got a bunch of student debt weighing them down.
Below, I’ll detail each of these changes and explain exactly how I think they’ll impact the market, and specific portions of the population.
This is especially important, because to me, these changes basically look like they’re all being made to help rich kids build credit.
I’m not entirely confident that anyone other that trust-fund babies will actually see any value out of the updates.
1. Rolling Student Loan Debt Into Mortgage Debt
The first change that should make buying a home with student loan debt easier than before is that Fannie Mae will be offering a new option that lets people get rid of their student loan debt by converting it to the total outstanding debt on a mortgage.
Basically, this lets you roll your student loan debt into mortgage debt, not reducing the amount you owe, but changing the structure of what you owe (from student loans to mortgage payments).
This is being called a cash-out refinance option, and it allows anyone with high-interest student loans to pay those loans off by refinancing their home loan, and converting the student loan debt into mortgage debt.
I can’t see this applying to anyone other than rich kids, who are saddled with student loans, and don’t make enough to qualify for a mortgage, but who’s parents offer to help make up the difference down the line, and allow them to take on bigger mortgages with bigger monthly payments (knowing that someone else is going to help foot the bill).
The only way that I see this working for people who aren’t rich is that it may allow them to reduce what they’ll eventually owe, if they’re able to qualify for an interest rate reduction (lower interest on the mortgage debt than they had on the student loan debt).
We’ll see how it actually shakes out, but I’m relatively skeptical that this will help the average American.
2. Improving Debt to Income Ratio Calculations
The second change being made to student loan debt mortgage qualifications is that Fannie Mae is going to allow people to improve their debt to income ratios by not including any non-mortgage related debt that’s being paid down by someone else.
Debt to income ratios are one of the most important parts of the mortgage qualifications process, as the basic rule is that banks will only offer you additional money if they feel you don’t already owe more than you can reasonably be expected to pay back.
This change will allow anyone with credit card debt, hospital debt, student loan debt, or any other form of debt that isn’t mortgage debt to exclude the debt from the debt to income calculations, if and only if that debt is being paid off by someone other than themselves (like parents, grandparents, etc.).
In my opinion, this will definitely only help out rich people, who probably don’t need the assistance anyway, but who want to get mortgage’s in their own name to build credit. To me, this seems like an update put in place specifically for trust-fund babies and other similar types; the people who need help the least.
This is especially true in that you’ll only be eligible to exclude debt from your debt to income ratio calculations by proving that someone else has been paying your debt down for at least 12 consecutive months before you apply for the new loan… and who (other than super rich kids), gets their debt paid for over a year by someone else???
3. Easing Up On Information Requirements
The third student loan mortgage change introduced by Fannie Mae is that they’re going to start allowing lenders to use student loan payment details puled from credit reports, where in the past, these had to be recalculated in underwriting any time that the payments were below 1% of the loan balance (virtually a guarantee, since most people take way more than 100 payments to pay off their student loans).
Anyone on an Income-Based Repayment Plan was especially likely to fail this part of the mortgage application process, since some of those people are making payments of literally $0 per month (if you make no money, and your payment is based on income, then you don’t have to pay anything either).
Anyone on the Pay As You Earn Repayment Plan, or the newer, REPAYE Plan, is likely to benefit from this update, and that’s a great thing.
This, to me, is probably the best part of the update, since I do believe that it’ll help many people who were previously disqualified for mortgages duet to student loans.
And personally, even though 2 or the 3 updates appear to be crafted specifically for rich kids, it’s at least a step in the right direction, and a signal that no matter what President Trump’s Student Loan Reform Plans end up looking like, at least some portion of the Government is on the case, and attempting to makes things easier for taxpayers.