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How to refinance your home loan if you have student loans

Reduced Cost Student Loan Consolidation for Homeowners

Updated Guidelines

Fannie Mae recently announced a new refinance underwriting guideline that relaxes lending rules on borrowers with student loans.

In addition to loosening guidelines to allow you to qualify using an income based payment plan, homeowners now have the opportunity to pay off student loan debt with out incurring the costs typically associated with a cash-out refinance.

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With this update, Fannie Mae has introduced a student loan cash-out refinance feature, a cost-effective alternative to use existing home equity to pay off student loan debt.

This feature provides the opportunity for borrowers to payoff one or more student loans through the refinance transaction, potentially reducing your monthly debt payments.

The typical costs that apply to cash-out refinance transactions will be waived when all requirements have been met.

Student Loans Eligible for Payoff

The new guideline contains elements of both a cash-out and a limited cash-out refinance transaction.  To waive the cash-out costs, your refinance must meet the following criteria:

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  • At least one student loan must be paid off.
  • Loan proceeds must be paid directly to the student loan servicer at closing.
  • Only student loans for which the borrower is personally obligated can be paid through the transaction.
  • Student loan debt must be paid in full with the proceeds – partial payments of student loan debt are not permitted.

Loan to Value / Combined Loan to Value

While you can pay off student loan debt and not incur the costs associated with a cash out refinance, the loan to value restrictions will follow standard cash out guidelines.

The below loan to value (LTV) figures included combined loan to value (CLTV) which includes second mortgages and home equity lines of credit.

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Primary Residence

  • 1 Unit – Fixed Rate: 80% Loan to Value / Adjustable Rate: 75% Loan to Value
  • 2-4 Units – Fixed Rate: 75% Loan to Value / Adjustable Rate: 65% Loan to Value

Second Home

  • 1 Unit – Fixed Rate: 75% Loan to Value / Adjustable Rate: 65% Loan to Value

Investment Property

  • 1 Unit – Fixed Rate: 75% Loan to Value / Adjustable Rate: 65% Loan to Value
  • 2-4 Units – Fixed Rate: 70% Loan to Value / Adjustable Rate: 60% Loan to Value

Maximum Cash Out

After paying off student loan in full, you may receive lower of 2% of the loan amount or $2,000 as cash out.

Mortgage Pay-Off

You may only pay off your existing first mortgage, and any purchase money second mortgage in addition to paying off your student loans.

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If you have a home equity line of credit, or second mortgage that was not taken out at the time of the purchase of your home, you may not pay off this loan through the refinance.

You have the option of subordinating that loan as long as you do not exceed the Loan to Value / Combined Loan to Value guidelines above.

Limited Cash-Out Refinance Requirements

Other requirements and restrictions for this new guideline will follow Fannie Mae’s limited cash-out out guidelines.

  • Property cannot be listed for sale at time of disbursement
  • Payoff of taxes ineligible unless escrow account is established
  • Payoff of delinquent taxes ineligible

Effective Date

These guidelines are effective immediately.  In order to receive an automated underwriting approval from Fannie Mae, your lender must include the Special Feature Code (SFC) 841, Student Loan Cash-Out Refinance when submitting to Desktop Underwriter.

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Student Loan Questions Answered

All lenders are not created equal.  Most of the readers that find this site because they’ve been researching solutions to challenges, and have been told 10 different things by 10 different loan officers.

We’ve created this resource to help you sift through the endless opinions and articles that may, or may not directly answer your question correctly.

There are several ways to ask questions, and get expert opinions on this website.

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  • Submit a Question:  On the bottom of this page, you’ll see a prompt that allows you to ask questions.  These questions come directly to me, and are answered very quickly.
  • Leave a Comment:  Below every article is the option to leave a comment or question.  We see these comments and questions in real-time and the always answered, usually pretty quickly.

In addition to researching your questions and providing you with expert advice, I can also introduce you to a lender friend that I know has experience with your specific situation and can help.


About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Thomas Holbert says:

    hello i would like to take the time to say thank you for the information . will this new information effect the 1 percent guideline you have to have in student loans that are in deferment

    • Hi Thomas,

      Thank you for the kind words. This guideline specifically addresses paying off those loans in deferment. If you are refinancing to pay off some loans, but not paying off loans that are deferred, you would need to use either the 1%, or Fannie Mae’s payment table to determine the payment.

  • Mike Harkins says:

    Hi Scott!! Long time no…
    I fortunately don’t have ‘kids’ with student debt; however – it’s g-child time (2 headed for college). Are parents of a child “directly responsible” for student loan debt (such that they can do the refi trick)?

    • Hi Mike, yes! long time 🙂

      Part of that Fannie Mae rule addresses your question on a couple of levels. Yes, if you are responsible for the debt, this new refinance guideline will work for you. Second, if you can show 12 months of payments being made by someone other than you, you can disregard the payments on that debt as counting towards your debt to income ratio.

      Hope this helps?

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