Fannie Mae recently made some important rule changes regarding what it takes to qualify for a loan.
These changes mostly apply to what we call the “debt-to-income ratio,” or how many revolving payments show on your credit versus the payment of the house you would like to buy, and what percentage of your income that totals to. This factor is what prevents most people from qualifying for a loan.
The first change they made applies to third-party payments. In the past, if you had student loan debt, your monthly payments would be counted against your debt-to-income ratio. For example, if your payment was $500 a month, the house you could afford would be $500 a month less.
Now, if you can prove a parent or a business (such as your employer) has been paying that debt for 12 consecutive months prior, they don’t have to count that debt against you. This is a major change because a lot of people have their parents pay their debt, but it’s still counted against them.
The second change applies to how Fannie Mae calculates the payment. Previously, they calculated 1% of the total debt each month. For example, if you owed $100,000, you had to pay $1,000 a month. However, if you were in a forbearance or an income-based payment plan where—for example—you couldn’t make enough to pay $1,000 but you could make enough to pay $180, and they granted you a $180 per month payment plan, they would only use that $180 sum rather than that 1% (or $1,000 sum) to count against your debt-to-income ratio.
The third change applies to refinancing process. This is for homeowners who have student loan debt or have children who have student loan debt and they want to refinance their house with a Fannie Mae loan and use the equity to pay off that debt.
Refinancing only makes sense if your student loan interest rate and mortgage rate follow a certain ratio. If your student loan interest rate is 8% and the new mortgage rates are 4%, for instance, refinancing would make sense. If your student loan interest rate is 2% and the new mortgage rates are 4%, though, it wouldn’t make sense.
Fannie Mae previously charged a quarter point fee to be able to do this, but now they’ve waived that fee, thereby encouraging homeowners to pull that debt out of the student loan area to put it into their home.
If you have any questions about these changes or you have student loan debt and that is the reason you didn’t qualify for a loan, please don’t hesitate to reach out to me. I’d be happy to help you.