college

Mortgage Help for Debt-Saddled Grads

New rules make it easier to qualify for a home loan or to use a refi to pay off college debt.

Today’s college grads leave school with an average of $34,000 in student-loan debt. That mound of debt is delaying homeownership among millennials. Parents and grandparents who cosigned private student loans or took out Parent PLUS loans may also be burdened. Now, mortgage giant Fannie Mae has launched loan-underwriting changes that will lighten the load.

When calculating a borrower’s monthly debt-to-income ratio, lenders will exclude payments made in the past year by someone else—typically a parent or employer—for nonmortgage debt, including student loans. And for those on an income-adjusted repayment plan, lenders will use the lower payment on a federally insured loan instead of the higher, fully amortized payment of principal and interest.

A third initiative allows homeowners to refinance their mortgage, taking cash out to disburse directly to a student-loan lender to pay off debt. That will also help parents or grandparents who borrowed to help the kids and now want to re­finance. The new Student Loan Cash-Out Refinance loan can’t exceed 80% of the current market value of the home. For example, refinancing a $175,000 mortgage, lowering the rate from 4% to 3.75% and rolling in $25,000 in student loans would save borrowers about $80 a month.

Refinancers will lose some student-loan protections, including income-based repayment and deferment on federal loans. You’ll lose any student-loan interest deductions for which you may have been eligible, but you’ll gain a larger mortgage-interest deduction if you itemize on your tax return.

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