Encouraging homeownership by easing student loan debt
Debt from student loans has risen steadily in recent years, and currently totals $1.4 trillion, according to Student Loan Hero. That’s nearly three times what was owed in 2006, making student loan debt the largest non-housing debt class today.
Student loan debt is often cited by potential buyers as the number one reason they are delaying life choices such as marriage, parenthood, and buying their first home. But it’s not just Millennials. Anyone with student loan debt could be affected.
Tapping into Home Equity
The key to easing student loan debt burden could be home equity. There’s $13.3 trillion in home equity in the U.S. That’s a resource that homeowners could leverage to pay off student loan debt
Fannie Mae introduced its Student Loan Cash-Out Refinance in 2016, and recently made the option widely available through Desktop Underwriter®, an automated underwriting system used by most lenders.
The Student Loan Cash-Out Refinance allows homeowners with at least 20 percent equity to refinance their mortgage and use the proceeds to pay down or pay off a student loan.
This spring, two additional updates went into effect to help expand the number of people who can be helped.
- Calculating Student Debt—Fannie Mae updated how it asks lenders to calculate debt-to-income ratios for borrowers with student debt. Historically, Fannie Mae required lenders to consider a fully amortizing payment for every student loan in the debt-to-income ratio calculation, regardless of whether the borrower was in an income-based repayment plan (which can significantly lower monthly payments). With the recent updates to policy, lenders can now use the documented income-based payments for DTI calculations. This policy change could have an immediate effect on people’s ability to purchase a home since 10 percent of federally insured student loan debt holders are on an income-based repayment plan, and that percentage is likely to grow.
- Debt Paid by Others—Some graduates are fortunate to have help with paying their bills, including their student loans. Often this help comes from a parent, but it could be a spouse/partner or even an employer. In the past, debt paid by others would be included in the graduate’s DTI ratio. However, under the new policy, debt paid by others will not be calculated in the borrower’s DTI as long as the borrower evidences the other party has been satisfactorily paying the debt for the past 12 months. This reduces the borrower’s DTI. For lenders, this change widens borrower eligibility.
Getting the Word Out
Fannie Mae surveys have shown us that there are a lot of misconceptions about home buying, from how much you need for a minimum down payment to how lenders calculate your debt-to-income ratio or DTI.
Fortunately, education and outreach programs can help. Framework Homeownership offers an online course that includes information about calculating how much someone can afford, how to choose a real estate agent and shop for a mortgage, home inspection basics, and the closing process.
Let’s Support the Next Generation of Homeowners — Together
Our industry needs to work with real estate professionals to help young adults achieve homeownership. With 44 million borrowers burdened by student loan debt, this is a huge opportunity.
To learn more, visit our website.