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New Fannie Mae Rules Help Home Buyers, Owners

By U.S. News & World Report

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.

More from U.S. News

Parent PLUS Loans Face Potential Reform

What Every High School Senior Must Know About Student Loans

5 Strategies for Handling Student Loan Delinquency

New Fannie Mae Rules Help Home Buyers, Owners originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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