New Fannie Mae Rules Help Home Buyers, Owners

Many student loan borrowers -- 71 percent, in a recent survey -- say student loans are one reason they've delayed buying a home. But that could soon be changing.

In the past, the Student Loan Ranger has explored and explained how student loans are taken into account when consumers apply for a mortgage. More recently, we shared some changes the Federal Housing Authority put in place to make it easier for student loan borrowers to qualify for mortgages.

[Read how mortgages are easier to get with deferred student debt.]

Last week, Fannie Mae, which was created in 1938 to help give banks the funds needed to offer mortgages to consumers and one of the biggest secondary markets for home loans in the U.S., announced three significant changes to its underwriting requirements as they pertain to consumers with student loans and all are effective immediately. Two of these changes can help borrowers obtain a mortgage, while a third change can help those with home equity reduce student loan debt.

Income-Driven Repayment Plans

Before this announcement, borrowers using an income-driven repayment plan for their student loans found that because those payments could change as part of the annual plan renewal, the lender approving the mortgage could not use that lower payment when calculating the consumer's debt-to-income ratio. Most mortgage lenders require a monthly debt-to-income ratio of no higher than 43-50 percent.

If a borrower was on an income-driven repayment plan, the lender was instructed to use 1 percent of the balance in place of the borrower's actual payment amount. But lenders using Fannie Mae underwriting standards can now use the existing payment, unless it is zero .

To put this in perspective, a borrower with $60,000 in federal student loans, an adjusted fross income of $50,000 and a family size of three would have a payment under the REPAYE program -- one of the several income-driven plans available -- of about $161.

If forced to use 1 percent of the balance in the mortgage calculation rather than the actual payment, that amount would be around $600, easily an amount that can mean the difference between a mortgage and no mortgage.

[Look at this side-by-side comparison of three income-based repayment plans.]

There are a few caveats to this new rule. First, the payment amount must show up on the borrower's credit report and must be more than zero . If the payment fails those criteria, the lender will be required to use the 1 percent value. Or, the borrower can then apply for a new income-driven plan plan that pays off the loan in full during the term. Examples of plans that would fit this criteria are consolidation, extended and graduated repayment plans.

Since credit reports can take a month or more to display activity, we advise borrowers planning on applying for mortgages to get their payment plans in place a few months before beginning the mortgage application process. Then you can confirm the payments are reflected on your credit report or obtain documentation showing the other plan.

Third-Party Payers

More and more employers are recognizing the value of offering student loan repayment as a benefit to their employees. In the past, the fact that the borrower did not have to make their student loan payments themselves was not considered in the debt-to-income calculation required for mortgages.

But the new Fannie Mae rules allow the mortgage lender to exclude those payments from the mortgage calculation as long as the borrower can supply documentation that a third party, such as an employer or parent, has satisfactorily made the payments for at least the last 12 months.

[Discover how young workers are turning to employers for student loan debt solutions.]

Paying Student Loans with Home Equity

This last change is probably better news for private student loan borrowers than most federal student loan borrowers. New rules will allow borrowers with enough equity in their home to refinance their mortgage to include funds to repay some or all of their student loans.

While a cash-out option has always been available to consumers with home equity, those cash amounts over and above the amount of the actual mortgage were typically charged fees and sometimes higher interest rates than the mortgage itself. Under the new rules, borrowers will receive the same rate on the amounts used to pay off student loans as for the new mortgage.

There are a few rules to this change. While you don't have to pay off all of your existing student loans, at least one loan must be paid in full as part of the transaction. Funds are sent directly to the student loan holder, and you can only use this program to pay loans that you, the mortgage borrower, are personally, legally responsible for.

While mortgage interest rates are typically cheaper than most private student loan rates and many parent PLUS and graduate PLUS loans, they may not be lower than those for federal Stafford or Perkins loans. Do your homework before refinancing.

Paying off federal loans in general means losing the lower payment, deferment and discharge options those loans maintain, so you'll want to make this decision while keeping the long term in mind.

Betsy Mayotte, director of consumer outreach and compliance for American Student Assistance, regularly advises consumers on planning and paying for college. Mayotte, who received a B.S. in business communications from Bentley College, responds to public inquiries via the advice resource "Just Ask" and is frequently quoted in traditional and social media on the topics of student loans and financial aid.