Student loan debt doesn’t have to crush your dream of owning a home.
Media outlets frequently report the impact student loan debt is having on borrowers. Americans owe 1.5 trillion in student loans. This massive debt obligation is making it impossible for some to buy a home.
Fannie Mae, however, has developed an innovative solutions program to help borrowers purchase homes as well as refinance existing homes.
One of the ways that I was able to successfully get rid of Sallie Mae was to refinance my home. Refinancing my home enabled me to pay off my largest loan and one credit card.
I did a cash-out refinance and got a new mortgage which was 20% more than my old mortgage. I had more than 20% equity in my home. In order to refinance a mortgage, you need at least 20% equity. I wrapped my old mortgage into the new, took that extra cash, and paid off my largest student loan debt and my largest credit card.
Buying a home with student loan debt
Fannie Mae offers a few options for borrowers: a cash-out refinance option; an option to exclude from a borrowers debt to income ratio credit card debt, auto loans, and student loans paid by someone else; and allows lenders to accept student loan payment information on credit reports.
Home Equity Loan Option
Under the cash-out refinance program, homeowners can take cash out of their home to pay off one entire student loan debt. The only use of this money can be for student loan debt. So, you would not be able to do what I did and pay off non student loan debt.
Also, Fannie Mae will not charge an extra 1% to 2% of the loan amount in fees. This is what normally a lender does when a borrower wants to take money out of their home. Under Fannie Mae, this will not occur.
Debt Paid By Others
Fannie Mae will also disregard student loans, credit cards, auto loans, and other revolving debt from your debt-to-income ratio. You must provide Fannie Mae documentation that someone else paid this debt for the previous 12 months.
Debt-to-Income Ratio Calculation
Lastly, Fannie Mae has changed how lenders calculate student loan payments. Even if a borrower wasn’t paying his or her full monthly balance due to being in an income driven repayment plan, lenders added to the borrowers debt ratio 1% of his or her outstanding loan balance. Now Fannie Mae will consider only what you pay monthly according to the information on your credit report. However, any borrower whose monthly payment is zero will have to have their calculation based on the 1% rule.
Eagle Home Mortgage Helping Borrowers Buy Homes
Fannie Mae’s program is catching on to the lending community. Eagle Home Mortgage will pay up to $13,000 of a borrower’s student loan debt when a house is purchased through them.
Maryland’s Department of Housing and Community Program also has a mortgage-student loan program. This program provides up to 15% to borrowers to pay off student loan debt.
I am sure there are others who are offering this program so do your research.
Do the Numbers Before Signing Up for These Programs
Before you think about signing up for any of these programs do the math first. There are plenty of mortgage and student loan calculators online for you to do the calculations. When I did my home equity loan, I saved about $350 a month after the transaction so it was worth it to me.
Put Difference Towards Debt and Savings
If you are able to save under these programs, put the savings that you obtain towards your existing debt and/or emergency fund. You will need a solid emergency fund as a homeowner and while these programs may be a blessing, you don’t want to make it a cursing on your life.