Fannie Mae announced a new student loan cash-out refinance program and policies to help borrowers who are burdened by student loan debt.
There are three major policies and programs that will be implemented.
- Student Loan Cash-Out Refinance: Homeowners will have the flexibility to pay off high-interest-rate student loans while potentially refinancing to a lower mortgage interest rate.
- Debt Paid by Others: This will widen borrower eligibility to qualify for a home loan by excluding from the debt-to-income ratio non-mortgage debt – credit cards, auto loans and student loans – that is paid by someone other than the borrower.
- Student Debt Payment Calculation: This allows lenders to accept student loan payment information on credit reports, which makes it more likely for borrowers with student debt to qualify for a home loan. Previously, Fannie Mae required lenders to recalculate student loan payments in underwriting if they were below 1 percent of the loan balance.
“We understand the significant role that a monthly student loan payment plays in a potential homebuyer’s consideration to take on a mortgage, and we want to be a part of the solution,” said Jonathan Lawless, vice president of customer solutions at Fannie Mae. “These new policies provide three flexible payment solutions to future and current homeowners and, in turn, allow lenders to serve more borrowers.”
The student loan cash out program expands on a program Fannie Mae announced in November with SoFi, which allowed homeowners to refinance their mortgage at a lower rate and pay down their student loans. This allowed borrowers to pay off student loans that had a higher interest rate and have a single payment at a lower interest rate.
In the United States, the total student loan debt sits at $1.4 trillion across 44.2 million people, according to NerdWallet. The average student in the class of 2016 has more than $30,000 in student loan debt.
However, this program is not just marketed at recent graduates, but also at parents who helped pay for college. The cash-out refinance option allows homeowners to also pay off any debt they took on for their children.
“We arrived at these product ideas after seeing the size of student loan debt, which is $1.4 trillion. But there’s another number to pay attention to — $8 trillion in home equity,” Lawless said to HousingWire. “There is enough housing equity in California alone to pay off the student debt of the entire nation. We wanted to find a way to unlock that equity.”