Earlier today, the mortgage giant Fannie Mae, which is currently run by the government, announced various solutions for those that have excessive student loan debt tied to their credit profile.
The mortgage solutions for borrowers with student loan debt is welcome by some and not welcome by others. The side that welcomes the new initiatives says this will provide better homeownership opportunities to many communities across America.
Those that think this is a bad move say these are not real solutions and will put more Americans at greater risk (due to the structure of the mortgage solutions put forth by Fannie Mae).
Previous Problems
The problem for many potential homeowners or potential homeowners over the last 5 years is the amount of student loan debt their children have taken on, and they co-signed for.
Under the current rules, a mortgage company must include the payment amount in the debt-to-income calculations even if the child is paying back the loan. Since technically they, the parents, are also responsible mortgage lenders, include the debt payment amounts into the debt-to-income calculation.
Relief For Parents
Fannie Mae’s mortgage solution for borrowers with student loan debt now allows a mortgage company to ignore student loan debt where the child is the primary borrower. Also in this are car loans and credit cards that parents co-sign for their children (but not mortgages parents co-sign for). Obviously, the borrower has to prove they’re not the primary borrower for the accounts before a lender will exclude them from the debt-to-income calculations.
As you can see, these new mortgage solutions can present a major problem for banks when the economy slows because if the child can’t pay back the student loan, it falls onto the parent.
It’s understandable that Fannie Mae wants to open the door for the purchase of a new home or the refinance of a current mortgage, but the question is; Does the solution put significant risk back into the mortgage lending business?
Only time will tell, and we’ll have to wait five to ten years to really see the full impact of this decision.
Per Fannie Mae
“Innovative Solutions for Making Homeownership Affordable for Borrowers with Student Loan Debt
Because there is rarely a “one size fits all” approach to this issue, the policies announced today provide options to borrowers based on their individual circumstances:
Source
- 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.”
Fannie Mae Loan Options
Fannie Mae offers a wide array of loan options to meet the needs of homeowners (and homebuyers). The two main options to choose from are:
- Fixed Rate Mortgage
- Adjustable Rate Mortgage
A fixed-rate mortgage is when the interest rate and your monthly payment are fixed for the entire term of the loan (they never change). Fixed-rate loans come in various terms, including a 30-year fixed, 20-year fixed, and a 10-year fixed rate option. Additional terms include a 25-year term and a 10-year term.
An Adjustable Rate Mortgage (aka ARM’s) are loans that have an initial fixed period where the rate and the payment do not change. After the fixed period, the rate and the payment adjust. Adjustable rate loans are based on a 30-year term, and the three fixed period options include a 5-year, 7-year, and a 10-year fixed term. After the fixed term is up, the rate you are paying is based on a margin and an index.
JB Mortgage Capital, Inc.
If you’re considering a refinance of your current mortgage or looking to purchase a home, please be sure to give us a call 1-800-550-5538. We’ll provide a no-cost/no-obligation quote on one of our many loan programs. We offer industry low mortgage rates, the latest technology to ensure a fast closing, and personal one-on-one service.
