Quick Answer: Using home equity to pay off student loans can hurt borrowers because Fannie Mae’s new cash-out refinance program converts unsecured student debt into secured mortgage debt. This means borrowers risk losing their homes if they can’t make payments, while losing federal student loan protections like income-driven repayment plans.
Mortgage giant Fannie Mae recently announced a change in underwriting polices they say will help more people with student loan debt to be able to qualify for a mortgage.
What I find most interesting about this is how lenders are adjusting their policies to get more people to qualify for mortgages rather than society dealing with the underlying student loan problem.
Fannie Mae said, “The new solutions give homeowners the opportunity to pay down student debt with a mortgage refinance, allow borrowers to exclude non-mortgage debt paid by others as part of the loan application process, and make it more likely for borrowers with student debt to qualify for a mortgage loan by allowing lenders to accept student debt payments included on credit reports.” – Source
Every weekday I read the enforcement actions, filings and fine print the outlets skip, and turn them into the one or two moves that actually improve your position — a rate worth moving for, a fee you can refuse, a deadline to beat before it costs you.
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The solutions Fannie Mae announced may allow borrowers to:
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- Student Loan Cash-Out Refinance: Offers homeowners the flexibility to pay off high interest rate student debt while potentially refinancing to a lower mortgage interest rate.
- Debt Paid by Others: Widens borrower eligibility to qualify for a home loan by excluding from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans, and student loans, paid by someone else.
- Student Debt Payment Calculation: Makes it more likely for borrowers with student debt to qualify for a loan by allowing lenders to accept student loan payment information on credit reports.
Taking cash out to pay off higher interest rate student loans that are scheduled to be paid over decades, can make good financial sense. You’ll need to do the math to fure out if it is right for you.
“Rohit Chopra, a senior fellow at Consumer Federation of America, said the cash-out refinancing option makes the most sense when the new mortgage rate is substantially lower than the rate on the student loans. Homeowners with older government loans at much higher rates or those with pricey private loans could do well under the program, as long as they have “solid income and a stable job,” he said.” – Source
As with any loan used to pay off federal student loans, once the loans are paid off and a new lender is owed then the debtor loses access to any of the income driven repayment programs. The old flexible repayment student loan debt turns into a lien against the home and if something then happens to make payments unaffordable, you could lose your home. But with everything else in the debt world, it’s all about balancing risk and rewards.
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Would your mortgage, then, be all or in part subject to the rules for bankruptcy regarding student loans dismissability?
Excellent question. In practice I can’t see the court rejecting the discharge because part of it was a student loan because the student loan company got paid.