These New Policies Could Make it Easier for Student Loan Borrowers to Get a Mortgage

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While the jury is out on how significant a barrier student loan debt is to owning a home, Fannie Mae is looking to end the debate.

Fannie Mae the government-sponsored enterprise that buys and securitizes home loans, is introducing three new policies designed to make it easier for individuals with student loan debt to get a mortgage. The policies will provide lenders originating Fannie Mae-approved loans with more options for these borrowers, according to Jonathan Lawless, Fannie Mae’s vice president of customer solutions. “The next generation still aspires to homeownership,” Lawless said. “But they don’t know they can qualify.”

Fannie Mae is now officially offering a student loan cash-out refinance option nationwide. The housing finance giant began piloting this product, which lets homeowners pay off high-interest student debt through a home refinancing, last November with online personal finance company Social Finance.

Additionally, one of the policies Fannie Mae is instituting will exclude non-mortgage debt paid by someone else, such as credit cards, auto loans and student loans, from a borrower’s debt to income ratio. “We’ve seen historically that a lot of people have others paying their debts for them,” Lawless said, including parents or employers who will pay off student loan debt for college graduates. To qualify for this exemption, prospective borrowers must document that 12 months’ worth of those debt payments were made by that other party.

In another bid to widen the number of borrowers with student debt who can qualify for a mortgage, Fannie Mae will also now allow lenders to accept the student loan payment information that appears on credit reports. In the past, Fannie Mae required lenders to recalculate student loan payments in underwriting if they were below 1% of the loan balance (which is often the case for people taking advantage of the four income-based repayment programs.) The previous policy was very conservative, Lawless said, particularly for the millions of people with federally-insured student debt in an income-based repayment plan. “For all of those consumers, we’re making it more likely that they will be approved” for a mortgage, Lawless said.

As for concerns that student loan debt increases the risk of a mortgage, Lawless suggested that the opposite was true. Based on Fannie Mae’s historical data, cash-out refinances where borrowers had student loan debt presented less risk in the end than other cash-out refinances or standard refinances, Lawless said. And to the extent that graduation is an indicator of future income potential, student loan borrowers can be a safe bet for lenders. “Folks with student debt actually perform very, very well,” Lawless said. “They are a very safe segment of the market.”

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