Buyers, homeowners with student debt get a big break

The nation's largest provider of mortgage money has eased its borrowing rules, allowing banks to create more home loans for first-time buyers and current owners who are struggling with student debt.

Q. Is it true that banks will no longer consider a loan applicant's student-loan debt when deciding whether to approve or reject a mortgage?

A. It's not true, despite some misleading recent media reports and broadcast commercials to the contrary. But it is true that Fannie Mae, the largest provider of mortgages in the nation, made some key changes about a month ago that will make it easier for those saddled with student-loan debt to get a home loan in the future - and perhaps even help their parents, too.

Fannie Mae, a quasi-government agency, doesn't make loans directly to borrowers. Instead, it buys mortgages that independent banks make to people, then pools those loans with others that it purchases and sells shares in those pools to private investors.

By selling their loans to Fannie, banks get a lump sum of cash they can use to issue even more mortgages to future borrowers. Roughly half of all outstanding home loans in the U.S. today are owned by Fannie Mae and a similar company, Freddie Mac.

About 43 million Americans owe a combined $1.26 trillion in student-loan debt. Monthly payments on those loans make it difficult for a first-time buyer to save for a down payment, much less gain a lender's approval for a new mortgage.

A key change in Fannie Mae's new policy involves the 6.5 million student-loan borrowers who have reduced their monthly payments by stretching them out over a longer period through the government's "income-driven repayment" program, commonly referred to as "IDR."

Fannie's revamped rules allow banks to consider the student borrower's lower IDR monthly payment (rather than the previously higher one) when reviewing a mortgage application, even if the long-term cost of the educational loan will stay the same or even go up. The change makes it easier to qualify for a mortgage because it essentially lowers the bank's loan underwriting requirements.

Another 8.5 million Americans could be helped by Fannie's decision to cut the cost of a current homeowner's "cash-out" refinancing, provided that the extra money that's taken based on the owner's equity will be used to pay off student debt. That's good news for grads who have been able to swing the purchase of a home over the past few years and now want to refinance to repay their educational loans, as well as for parents who want to refinance to pay their kid's college debt.

A little-noticed benefit of Fannie Mae's policy change also will aid current or former students who get help to meet ongoing nonmortgage debt, such as credit card bills or car payments, from their parents, grandparents or others. Lending institutions that sell their loans to Fannie will no longer need to consider a student or grad's nonmortgage debt when considering a home-loan application, provided that the payments have been made promptly for each of the previous 12 months.

To be sure, the new rules are complicated, and not every student-loan debtor will qualify. Call a few local lenders and mortgage brokers for help. You also can contact Fannie Mae's Resource Center at (800) 232-6643 or visit www.fanniemae.com.

Real estate trivia: A study performed by Consumer Reports magazine last year found U.S. homeowners had a combined $8.37 trillion in mortgage debt. But student-loan debt was second, at $1.26 trillion - roughly twice the amount Americans owed on credit cards.

Q. I recently retired from the military after doing two stints in Afghanistan. I would like to use my VA home-loan benefits to buy a duplex, where I would live in one unit and rent out the other. Does the Veterans Affairs's loan program include duplexes, or is it limited to only single-family homes?

A. The VA will guarantee home loans for duplexes, triplexes and four-unit apartment buildings, provided that the veteran makes one of the units his or her primary residence. Loan limits vary from one part of the nation to the next, based largely on a county's average property prices.

Call the VA Loan Center, (877) 827-3702, for more information or visit www.va.gov. But before you do, please know that I and millions of my readers give thanks for your service to our nation.

Q. My wife and I own our own home. We would like to sell and move into a retirement community, but we don't have a lot of equity in our current house and the net proceeds from the sale would leave us about $3,500 short of the down payment and closing costs on the retirement home we like. We have heard the Social Security Administration can provide us with a one-year advance payment on our monthly benefits, which would be more than enough to cover the cost of buying the new place. How do we apply?

A. You can apply for an advance at your nearest Social Security office, but it's likely your request will be rejected.

The federal government generally limits advance payments to folks who are facing what it defines as a "financial emergency." According to a Social Security spokesperson, the program is for those who "need money right away due to a threat to health or safety, such as not enough money for food, clothing, shelter or medical care."

You and your wife already own a home, and your four-page letter suggests that neither of you is hungry or is facing big medical bills. That likely means you and your spouse probably will not qualify for a Social Security advance payment.

• For the booklet "Straight Talk About Living Trusts," send $4 and a self-addressed, stamped envelope to David Myers/Trust, P.O. Box 4405, Culver City, CA 90231-4405.

© 2017, Cowles Syndicate Inc.