Fannie Mae, or the Federal National Mortgage Association, has developed a new standard that will allow borrowers to fold their student loan balances into their home mortgages. Borrowers will need enough home equity to be eligible for this program.
This raises concerns and questions on whether this is a smart move to do. CBS News reported that it is still unclear if this will provide more benefits to borrowers.
It is possible that turning student loan debt to mortgage debt could cut the interest rates and payments required by some debtors. On the other hand, it may remove some of the protections that come with federally guaranteed student loans, though.
Borrowers should do their research well and identify whether they need those particular protections. If they do, then forgoing the program may be their best bet. For those who have significant home equity and significant student loan debt, this program may benefit them.
According to The Detroit Free Press, Bill Banfield, executive vice president of capital markets for Detroit-based Quicken Loans, said that many borrowers with student loans found it difficult to obtain a mortgage when stricter guidelines on college debt were implemented. The lenders had to calculate student debt payments using more conservative formulas under the restrictions.
Jon Lawless, vice president of product development for Fannie Mae, said that this new initiative will allow those with enough home equity and income to execute "cash-out" refinances. This gives them extra money to pay off other debts.
In this particular case, the additional cash would be used to repay student loan debt that the borrowers owe or have co-signed for. Moreover, there is no specific dollar limit on how much debt can be repaid this way.
The Fannie Mae program does restrict the borrower's total mortgage debt to a "conventional" loan. This places a limit that ranges between $424,100 and $636,150 - depending on where one lives.
