The havoc student debt plays on the ability to qualify for mortgage loans was eased a bit recently. Fannie Mae announced that it would waive its .25% fee previously applied to borrowers who refinanced their mortgages in order to pay off one of their student debt educational loans. Prior to this announcement, borrowers had to pay an additional .25% to their interest rate on their home loan.
Since nearly one third of all loans are guaranteed by Freddie Mac and Fannie Mae instruments, this announcement, though not substantive in reducing payment responsibilities, is a very good start for student indebted homeowners to break a seemingly never-ending debt cycle. When this program was piloted last November in San Francisco by Sofi, Jonathan Lawless, Vice President of Fannie Mae, said that inquires about the new waiver were “…off the charts.”
The qualification caveat for this Fannie Mae fee waiver requires that the borrower must essentially use the fee waived money to pay off their own student or parent loan or a loan they co-signed. Mortgage holders with private educational loan instruments do not have access to this waiver as private instruments have fewer benefits than those with federal educational loan instruments and their interest rates are higher.
Key elements to pay attention to with this Fannie Mae waiver are possible tax implications. Both federal and private educational loans allow tax deductions up to $2,500. on interest payments without having to itemize deductions. Deductions on mortgage debt are allowable only if you do itemize, however. With alternative minimum tax (AMT) accounts, no deductions are allowed on home equity interest. Cashing out via this refinancing plan to pay off $120,000. in student loans would then amount to interest deductions up to $100,000. of that debt as long as there is no other home equity debt and the borrower is not using an AMT account.
Additionally, for borrowers who can prove that someone else (parent, employer, etc.) paid off your non-mortgage debt in the last 12 months, Fannie Mae will “…no longer count that debt in your debt-to-income ratio (student debt, credit card debt, auto loan debt) when qualifying for a loan..” and the borrower will likely qualify for a better interest rate. And borrowers who are on income-based student debt repayment plans, such as medical students with a large amount of student debt who will soon be able to repay their debt quickly due to soon-to-be surging higher incomes, will be able to pay less than the full amount of their federal student loan because they will pay back that loan faster.
Bottom line, this new Fannie Mae fee waiver for student loan indebted homeowners does ease mortgage restrictions BUT, as always, borrowers should consult with a savvy financial planner and/or tax attorney before signing up and signing on.