It’s a Good Time to Trade Your Student Debt for Home Debt

First, it is expanding its cash-out mortgage refinance option, which lets borrowers trade high-rate student loan debt for lower-rate home loans. SoFi, a personal finance lender that is not a bank, became the first to test the program last year, and now Fannie Mae is expanding it to all of its lenders. About 1,800 lenders sell loans to Fannie Mae, Mr. Lawless said.

Mr. Lawless declined to provide specific numbers for refinancings under the SoFi test, but said there was strong interest among other lenders in offering the option.

The broadened refinance program should help not just students who borrowed money for themselves, he said, but also parents who borrowed on behalf of their children or who co-signed for a loan. Private student loans — those made not by the government, but by banks or other lenders — typically require co-signers. In all, about 8.5 million people could potentially benefit from the expanded program, he said.

Second, borrowers applying for a mortgage may now exclude debt being paid by others — say, credit cards or student loans being paid off by a parent or an employer — from their applications. That helps give them a better debt-to-income ratio — an important criterion in a loan application — and one that makes it more likely they will qualify for a mortgage.

Finally, another change helps student borrowers who are on flexible payment programs, which tie monthly loan payments to a borrower’s income. Previously, Fannie Mae required lenders to factor in higher monthly loan payments, rather than the borrower’s lower, flexible payments, when calculating an applicant’s debt-to-income ratio, which made it harder to qualify for a mortgage.

Now, Mr. Lawless said, lenders may use the lower payment, which should help more borrowers qualify for home loans. (The rationale for the change, he said, is that if a…

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