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Mortgage

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Cash-out refinance, new debt-to-income calculations spur homeownership

Confirming what sources told HousingWire yesterday, Fannie Mae this morning announced a significant expansion of its student loan cash-out refinance program and introduced new policies to help borrowers with student loan debt get qualified for mortgage loans.

“We understand the significant role that a monthly student loan payment plays in a potential home buyer’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 level of student debt in the U.S. has spiraled over the last decade to $1.4 trillion, effectively locking out millions of potential homebuyers from the market. The new Fannie Mae programs address specific roadblocks that these borrowers face, providing a jump-start to a whole generation of homebuyers.

Fannie Mae’s new solutions include:

  • Student loan cash-out refinance: Offers homeowners the flexibility to pay off high interest rate student debt while potentially refinancing to a lower mortgage interest rate.
  • Debt paid by others: Widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else.
  • Student debt payment calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.

The new student loan cash-out refinance option expands a program Fannie Mae rolled out with SoFi in November. Lawless said the overwhelmingly positive reaction to that program convinced Fannie Mae to broaden its scope.

“We were really testing market reception and we got a lot of interest from consumers and a lot form interest from lenders who wanted to have access to this same type of program. The market reception was such that we were really confident this was needed,” Lawless said.

Fannie Mae created the new programs to help counter the stifling effect student debt was having on the housing market, Lawless said. Many potential borrowers have been unable to get past the debt-to-income threshold to buy their first house, while parents who helped pay for education have also been hit.

“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. “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.”

The cash-out refinance allows homeowners to pay off not only their own student debt, but any debt they took on for their kids' education.

“By tapping into their equity, parents could directly free up the next generation of homeowners,” Lawless said. 

And the change in the debt-to-income calculation is going to be a huge benefit to the industry, Lawless said.

"We spent a lot of time with our customers, who are lenders, hearing their frustrations and looking for new opportunities," he said. "The biggest challenge today is being able to qualify people with student debt for mortgage loans. It's exciting to make it easier for lenders and help more people become homeowners." 

 

 

 

 

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