The massive amount of student debt carried by college graduates could become less of an issue for those who want to become homeowners under new policies announced today by Fannie Mae.
According to the giant financial institution’s figures, grads carry a total of $1.4 trillion in school debt. While that’s an “astonishingly high” amount, says Fannie Mae’s Jonathan Lawless, the figure that blows him out of the water is the average $35,000 in debt carried by 2015 grads.
“That’s just a shocking number,” he told Inman.
To put a dent in those figures, Fannie Mae will now buy loans from primary lenders in which the borrower has been making payments under an income-based payment plan. Under these plans, payments are lower than what is ordinarily required because borrowers aren’t earning enough to make a full payment.
Lawless, who is vice president of customer solutions at the Washington-based second market company, called this “one of the most important changes” to its underwriting requirements.
Until now, it would require lenders to override what the borrower was actually paying under the income-based plan with an amount equal to a full payment. And the result would have a negative impact on the borrower’s all-important debt-to-income ratio.
Now, though, the full-payment override will not be necessary.
People who pay back the school loans under income-based plans are “a growing and meaningful part” of the student debt market, Lawless told Inman.
Fannie Mae feels “very comfortable” with the lower payment, he said. “If the payment goes up, it means their incomes probably have gone up.”
In another change, the company said it would widen borrower eligibility by excluding from the borrower’s debt-to-income ratio school loans that are being paid by someone other than the borrower.
The same goes for other non-mortgage debt such as credit cards and auto loans.
The new rule says the payments can be made by a relative or a friend. But they have to have been made consistently over the proceeding 12 months with no late or missed payments.
Borrowers must show evidence that they payments have been made on a consistent basis. If so, they will be overlooked.
Here, Lawless doesn’t expect usage to be super high. But if a parent or someone else is making a borrower’s payments on his behalf, “it doesn’t make sense” to count that against him.
In a third step to ease the burden of student debt on current home owners, Fannie Mae will now allow borrowers to refinance their higher interest-rate school loans into a new, lower-rate mortgage.
Fannie Mae sets the rules for most lenders. If a loan does not meet the government sponsored requirements, lenders can’t move them off their books and replenish their coffers to make more loans. So they tend to underwrite to what Fannie requires.
“Probably the no. 1 issue our customers come to us about is student debt,” Lawless said.
“We understand the significant role that a monthly student loan payment plays in a potential home buyer’s consideration to take a mortgage, and we want to be part of the solution.
“We hope to get lenders and real estate agents to be more willing to work with clients who have student debt, and we hope to negate the perception that borrower’s with school loans can’t get a mortgage.”
Lew Sichelman’s weekly column, “The Housing Scene,” is syndicated to newspapers throughout the country.
