Fannie Mae and Student Loan Programs: Navigating Homeownership with Student Debt

Fannie Mae plays a significant role in the housing market, striving to make homeownership accessible to millions of Americans. Recognizing the increasing burden of student loan debt, Fannie Mae has implemented policies and programs to assist borrowers in qualifying for a mortgage while managing their student loan obligations. This article explores Fannie Mae's approach to student loan programs, including financing for student housing, and strategies for borrowers with student debt to achieve their homeownership goals.

Fannie Mae's Commitment to Homeownership

Fannie Mae is dedicated to providing access to homeownership, understanding that education is key to empowering future homeowners. They aim to offer tools and information that pave the way for owning a home. Fannie Mae partners with lenders to create housing opportunities across the country, driving positive changes in housing finance to make the home buying process easier, while reducing costs and risk.

Fannie Mae's Role in Student Housing

Fannie Mae Multifamily provides financing options for Student Housing properties where greater than 40 percent of the units are leased to undergraduate or graduate students. Dedicated Student Housing properties, defined as those with 80 percent or more units leased to students, require additional underwriting documentation. The Student Housing team utilizes Fannie Mae products and executions, including Student Housing Credit Facilities and Green financing products, which offer water and energy savings that benefit the Borrower’s bottom line. Student Housing mortgage loans offer customizable features similar to Conventional Mortgage loans, with competitive pricing that adjusts to changing market conditions. These loans are subject to the volume cap mandated by the FHFA.

New Policies for Borrowers with Student Debt

Fannie Mae has announced new policies designed to help more borrowers with student debt qualify for a home loan. These innovations address the challenges and obstacles to homeownership caused by the significant increase in student loan debt over the past decade, providing access to credit for qualified borrowers. Jonathan Lawless, Vice President of Customer Solutions at Fannie Mae, acknowledges the impact of monthly student loan payments on a potential home buyer’s decision to take on a mortgage and aims to be part of the solution.

How Student Loans Impact Mortgage Qualification

Even with student loans, it’s possible to qualify for a mortgage if you meet certain requirements, including the maximum debt-to-income (DTI) ratio. Like with any type of loan, your ability to qualify for a home loan depends on your credit score and ability to repay.

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One of the key factors that lenders look for, and that student loans will impact, is your debt-to-income ratio. Your DTI includes all your debts (which include your student loan payments) versus all your earnings. “Maximum DTI ratios are typically set at 43 percent, depending on whether it’s a government-backed loan or not,” says Leslie Tayne, a debt relief attorney in Melville, New York. “That means your monthly debt obligations divided by your monthly income should not exceed 43 percent for best odds of loan approval.

As is the case with a conventional loan, under the FHA mortgage guidelines for student loans, your student loans will be considered in your debt obligations.

Strategies for Managing Student Loan Debt and Qualifying for a Mortgage

Several strategies can help borrowers manage their student loan debt and improve their chances of qualifying for a mortgage:

Switch to an income-driven repayment plan: This can help lower your DTI ratio and increase your odds of getting approved.
Student loan debt with a co-signer: If a co-signer - a parent, for example - is repaying your student loans, you may be able to remove the debt from DTI calculations.
Medical professional loans: Some lenders offer physician mortgages, which are specifically for borrowers who have taken on debt to complete medical school.
Shop around: Research the competition and choose a reputable lender who can help you get preapproved.
Add a co-borrower to the loan: “Additional income always helps with qualification,” says Juan Carlos Cruz, founder of Britewater Financial Group, based in Brooklyn, New York.
Apply for down payment assistance: If it’s your first time buying a home, you may be able to qualify for down payment assistance via your local or state housing authority. In some cases, programs are designed with students in mind, too. For example, recent graduates in Ohio can apply for down payment assistance between 2.5 and 5 percent of the purchase price.
Calculate your DTI ratio: If your DTI ratio is too high to qualify for a mortgage, you may need to pay off student loans first.
Evaluate your savings: It may not make sense to pay off your student loans if you do not have enough saved for a home down payment. Having 20 percent saved for a down payment can make your monthly mortgage payments more affordable.
Free Certificate Course for Homebuyers: Once you finish the course and pass a brief quiz, you’ll receive a certificate of completion to share with your lender.

Fannie Mae Guidelines on Debt Assessment

Fannie Mae provides specific guidelines for lenders to assess a borrower's debt obligations, including student loans. These guidelines ensure a consistent and fair evaluation of a borrower's ability to repay the mortgage.

Recurring Monthly Debt Obligations

When the borrower is required to pay alimony, child support, or separate maintenance payments under a divorce decree, separation agreement, or any other written legal agreement-and those payments must continue to be made for more than ten months-the payments must be considered as part of the borrower’s recurring monthly debt obligations. However, voluntary payments do not need to be taken into consideration and an exception is allowed for alimony. For loan casefiles underwritten through DU, when using the option of reducing the borrower’s monthly qualifying income by the alimony or separate maintenance payment, the lender must enter the amount of the monthly obligation as a negative alimony or separate maintenance income amount.

All installment debt that is not secured by a financial asset-including student loans, automobile loans, personal loans, and timeshares-must be considered part of the borrower’s recurring monthly debt obligations if there are more than ten monthly payments remaining. However, an installment debt with fewer monthly payments remaining also should be considered as a recurring monthly debt obligation if it significantly affects the borrower’s ability to meet their credit obligations.

Revolving charge accounts and unsecured lines of credit are open-ended and should be treated as long-term debts and must be considered part of the borrower's recurring monthly debt obligations. These tradelines include credit cards, department store charge cards, and personal lines of credit.

Debts Paid by Others

When a borrower is obligated on a non-mortgage debt - but is not the party who is actually repaying the debt - the lender may exclude the monthly payment from the borrower's recurring monthly obligations. This policy applies whether or not the other party is obligated on the debt, but is not applicable if the other party is an interested party to the subject transaction (such as the seller or real estate agent). Non-mortgage debts include installment loans, student loans, revolving accounts, lease payments, alimony, child support, and separate maintenance.

Debts Assigned by Court Order

When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. The lender is not required to evaluate the payment history for the assigned debt after the effective date of the assignment.

Bridge Loans

When a borrower obtains a bridge (or swing) loan, the funds from that loan can be used for closing on a new principal residence before the current residence is sold.

Tax Installment Plans

The payments on a federal income tax installment agreement can be excluded from the borrower’s DTI ratio if the agreement meets the terms in Debts Paid by Others or Installment Debt described above. Acceptable evidence includes the most recent payment reminder from the IRS, reflecting the last payment amount and date and the next payment amount owed and due date.

HELOCs

When the mortgage that will be delivered to Fannie Mae also has a home equity line of credit (HELOC) that provides for a monthly payment of principal and interest or interest only, the payment on the HELOC must be considered as part of the borrower’s recurring monthly debt obligations.

Non-Applicant Debts

Credit reports may include accounts identified as possible non-applicant accounts (or with other similar notation). debts the borrower applied for under a different Social Security number or under a different address. If the debts do not belong to the borrower, the lender may provide supporting documentation to validate this, and may exclude the non-applicant debts for the borrower’s DTI ratio.

Deferred Installment Debts

Deferred installment debts must be included as part of the borrower’s recurring monthly debt obligations.

Contingent Liabilities

The lender is not required to include this contingent liability as part of the borrower’s recurring monthly debt obligations provided the lender obtains a copy of the applicable loan instrument that shows the borrower’s financial asset as collateral for the loan.

Student Loan Payment Verification

If a monthly student loan payment is provided on the credit report, the lender may use that amount for qualifying purposes. If the borrower is on an income-driven payment plan, the lender may obtain student loan documentation to verify the actual monthly payment is $0.

Student Loans in Forbearance or Deferral

Both Fannie Mae and Freddie Mac guidelines address this. In general, if you have 10 months or less left on your repayment plan, your lender can opt not to include your student loans in the DTI ratio at all. This might also be the case if your student loans are set to be fully forgiven.

VA Loan Considerations

If you’re an active member of the military, veteran or surviving spouse, you might be thinking about getting a VA loan. First, VA loan lenders typically look for a DTI ratio of no more than 41 percent. On the other hand, if you’re currently making student loan payments or expect to be within 12 months of your closing date, your mortgage lender is required to calculate an estimated payment. If your student loan payment is actually higher than that, then that’s what needs to be used, according to Schulze.

USDA Home Loan Considerations

Generally, lenders look for a DTI ratio of 41 percent with a USDA home loan, but it can exceed that in some circumstances.

Sallie Mae Student Loans

Sallie Mae offers various student loan options for undergraduate, graduate, and career training students. Their loans may be offered at a lower rate than PLUS loans, depending on the creditworthiness of the applicant(s). However, it's essential to explore federal loans and compare terms and features, as private student loans with variable rates can increase over the loan's life. Federal student loans provide flexible repayment options, including income-based and income-contingent repayment plans, and loan forgiveness and deferment benefits, which other student loans are not required to provide.

Sallie Mae Loan Requirements and Features

To be eligible for a Sallie Mae loan, borrowers must be U.S. citizens or permanent residents and provide an unexpired government-issued photo ID. Applications are subject to a requested minimum loan amount of $1,000, and current credit and other eligibility criteria apply. Loan amounts cannot exceed the cost of attendance less financial aid received, as certified by the school.

Sallie Mae offers a Graduated Repayment Period (GRP) that allows interest-only payments for the initial 12-month period of repayment. Borrowers or cosigners can enroll in auto debit to receive a 0.25 percentage point interest rate reduction benefit.

Cosigner Release

Only the borrower may apply for cosigner release. In the last 12 months, the borrower can’t have been past due on any loans serviced by Sallie Mae for 30 or more days or enrolled in any hardship forbearances or modified repayment programs. In addition, the borrower must have paid ahead or made 12 on-time principal and interest payments on each loan requested for release. The loan can’t be past due when the cosigner release application is processed. The borrower must also demonstrate the ability to assume full responsibility of the loan(s) individually and pass a credit review when the cosigner release application is processed that demonstrates a satisfactory credit history including but not limited to no: bankruptcy, foreclosure, student loan(s) in default or 90-day delinquencies in the last 24 months. Requirements are subject to change.

Navigating the Decision: Student Loans vs. Mortgage

Deciding whether to prioritize paying off student loans or pursuing homeownership is a personal decision. There is no right or wrong answer. Instead, you’ll need to consider your long-term plans, the local housing market and your ability to juggle multiple debt loads. According to the National Association of Realtors, 37 percent of first-time homebuyers also have student loan debt.

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