Mortgage "cash-out" to cover student loan ?

[aparsons3]

With the new Fannie Mae program in April,I am wondering if the following is possible:

I am new attending making 210k.
Wife is resident making 50k.
Together we have 200k in student loan debt. 6.8% PAYE
We currently rent.

We are looking to buy early next year. Could we buy a ~300k house but take a 500k mortgage through the new FM program and pay off the student loan? In effect consolidating our loan to 4% and now tax deductible mortgage interest.

All thoughts/comments appreciated.

[Donnie]

I don't know a ton about the Fannie program, but if you are asking whether you can take out $500k of debt against a house worth $300k, the answer is almost certainly no.  No lender will lend 167% of value that I know of.  If they do, you are going to end up at the same high rates as the student loan since anything beyond 100% of the value is effectively unsecured debt.  Fannie likely has some eligibility criteria around LTV (loan-to-value) that you can look up for your situation.

[aparsons3]

Yeah the point of the Fannie Mae program was to basically allow a "cash-out" above the worth of your house specifically for a student loan.

[Donnie]

Doesn't look that way based on my admittedly quick perusal.   It says the standard cash-out Eligibility Matrix applies, which shows 75-80% LTVs.

Student Loan Cash-Out Refinances

The student loan cash-out refinance feature allows for the payoff of student loan debt through the refinance transaction with a waiver of the cash-out refinance LLPA if all of the following requirements are met:

✓	Requirements for Student Loan Cash-out Refinances
	The loan must be underwritten in DU. DU cannot specifically identify these transactions, but will issue a message when it appears that only subject property liens and student loans are marked paid by closing. The message will remind lenders about certain requirements below; however, the lender must confirm the loan meets all of the requirements outside of DU.
	The standard cash-out refinance LTV, CLTV, and HCLTV ratios apply per the Eligibility Matrix.
	At least one student loan must be paid off with proceeds from the subject transaction with the following criteria: proceeds must be paid directly to the student loan servicer at closing; at least one borrower must be obligated on the student loan(s) being paid off, and the student loan must be paid in full - partial payments are not permitted.
	The transaction may also be used to pay off one of the following: an existing first mortgage loan (including an existing HELOC in first-lien position); or a single-closing construction-to-permanent loan to pay for construction costs to build the home, which may include paying off an existing lot lien.
	Only subordinate liens used to purchase the property may be paid off and included in the new mortgage. Exceptions are allowed for paying off a PACE loan or other debt (secured or unsecured) that was used solely for energy improvements (see B5-3.4-01, Property Assessed Clean Energy Loans and B5-3.3-01, HomeStyle Energy for Energy Improvements on Existing Properties, for additional information).
	The transaction may be used to finance the payment of closing costs, points, and prepaid items. With the exception of real estate taxes that are more than 60 days delinquent, the borrower can include real estate taxes in the new loan amount as long as an escrow account is established, subject to applicable law or regulation.
	The borrower may receive cash back in an amount that is not more than the lesser of 2% of the new refinance loan amount or $2,000. The lender may also refund the borrower for the overpayment of fees and charges due to federal or state laws or regulations, or apply a principal curtailment (see B2-1.2-02, Limited Cash-Out Refinance Transactions, for additional information).
	Unless otherwise stated, all other standard cash-out refinance requirements apply.

[Zaphod]

Wow, so even the government sees this as a viable transaction now. This is a great tool to switch from a bad debt to a much better debt if its really a traditional mortgage.

[hightower]

Even if this were possible it's still not smart IMHO. What if you end up hating your new house and want to move? What if the housing market drops by 50% value again as it did in 2008? What if you lose your job and need to move to find a new one right away or after that housing market crash occurs? There are too many bad scenarios I can imagine to even consider taking out a loan 200k above the value of the house. A reduction in interest rates from 6.8% to say 3% real (after mortgage interest tax deduction) is not worth it. You should keep renting and pay off student loans as fast as possible. A dual income physician couple with no kids can pay those loans off insanely fast.

[q-school]

hightower wrote:

Even if this were possible it’s still not smart IMHO. What if you end up hating your new house and want to move? What if the housing market drops by 50% value again as it did in 2008? What if you lose your job and need to move to find a new one right away or after that housing market crash occurs? There are too many bad scenarios I can imagine to even consider taking out a loan 200k above the value of the house. A reduction in interest rates from 6.8% to say 3% real (after mortgage interest tax deduction) is not worth it. You should keep renting and pay off student loans as fast as possible. A dual income physician couple with no kids can pay those loans off insanely fast.

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agree!  even if you couldn't pay off the loans insanely fast, you could at least get yourself together and get a big chunk paid down.  i know it's in vogue here to get everything paid off right away, but if you have good savings and spending habits, you will be fine.  focus on being a great attending!  it's not that easy!

 

good luck!

 

[Donnie]

hightower wrote:

Even if this were possible it’s still not smart IMHO. What if you end up hating your new house and want to move? What if the housing market drops by 50% value again as it did in 2008? What if you lose your job and need to move to find a new one right away or after that housing market crash occurs? There are too many bad scenarios I can imagine to even consider taking out a loan 200k above the value of the house. A reduction in interest rates from 6.8% to say 3% real (after mortgage interest tax deduction) is not worth it. You should keep renting and pay off student loans as fast as possible. A dual income physician couple with no kids can pay those loans off insanely fast.

Click to expand...

The other side of the point you raise is that if it were possible to borrow $500k against a $300k house to pay off student debt, you could always BK / let the bank foreclose on your house, then the student debt and mortgage would be gone.  The banks aren't going to take that kind of risk, so there is almost no chance you can do such a thing.

[Zaphod]

Taking out a mortgage more than the value isnt smart at all, but none of those issues are that big a deal otherwise, its certainly preferable to have mortgage debt in any bad situation than student loan debt.

Whats the worst that could happen, foreclosure? At least thats a possibility with a mortgage.

[Kamban]

hightower wrote:

You should keep renting and pay off student loans as fast as possible. A dual income physician couple with no kids can pay those loans off insanely fast.

Click to expand...

I agree. Don't know why, sometimes I wonder if I should bang my head on the wall after reading such posts.

What is it with taking on a huge debt when there is already a sizeable debt. Why buy a house when one is just a newly minted attending and the spouse is a resident. What happens if the OP does not like the job after 2 years or does not become a partner or finds a more lucrative offer in a different city. What happens if the wife has a better offer in another distant place once she graduates. Why not rent and pay off the student loan, so that there is only a house loan when they settle and buy their first house.

 

Apologize to the OP and the readers for the rant.

 

[Zaphod]

Kamban wrote:

hightower wrote:

You should keep renting and pay off student loans as fast as possible. A dual income physician couple with no kids can pay those loans off insanely fast. 

Click to expand…

I agree. Don’t know why, sometimes I wonder if I should bang my head on the wall after reading such posts.

What is it with taking on a huge debt when there is already a sizeable debt. Why buy a house when one is just a newly minted attending and the spouse is a resident. What happens if the OP does not like the job after 2 years or does not become a partner or finds a more lucrative offer in a different city. What happens if the wife has a better offer in another distant place once she graduates. Why not rent and pay off the student loan, so that there is only a house loan when they settle and buy their first house.

 

Apologize to the OP and the readers for the rant.

 

Click to expand...

Oh, let me clarify for the OPs particular situation. I wholly agree with the above posters, I was as usual looking at the general idea of the scenario and not the OP actual.

Buying straight out is just plain not smart, puts you at a severe disadvantage especially if your work knows you're "stuck".

[hightower]

Zaphod wrote:

Taking out a mortgage more than the value isnt smart at all, but none of those issues are that big a deal otherwise, its certainly preferable to have mortgage debt in any bad situation than student loan debt.

Whats the worst that could happen, foreclosure? At least thats a possibility with a mortgage.

Click to expand...

I understand that foreclosure is the likely event if you stop paying your mortgage.  But, for a high income earning professional, couldn't the bank take you to court and get a judge to garnish future wages or take money from your retirement or something along those lines?  I'm asking an honest question here.  Is foreclosure the worst thing that can happen if one stops paying their mortgage?

[Zaphod]

hightower wrote:

Zaphod wrote:

Taking out a mortgage more than the value isnt smart at all, but none of those issues are that big a deal otherwise, its certainly preferable to have mortgage debt in any bad situation than student loan debt.

Whats the worst that could happen, foreclosure? At least thats a possibility with a mortgage.

Click to expand…

I understand that foreclosure is the likely event if you stop paying your mortgage.  But, for a high income earning professional, couldn’t the bank take you to court and get a judge to garnish future wages or take money from your retirement or something along those lines?  I’m asking an honest question here.  Is foreclosure the worst thing that can happen if one stops paying their mortgage?

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Everyone looks at foreclosure as some horrible punitive thing but its not. Its a contractual element and they cannot do anything other than whats in the contract, ie, foreclose. Student loan servicers on the other hand can and have garnished wages, put you in collections, etc.... Foreclosure is simply a contractual right if you chose to go that rouite, with a lot of smartly applied negative emotions put onto borrowers by the holders. Businesses have no issue exercises these options when it suits their purposes or risks/rewards have shifted.

[q-school]

does it affect your credit rating if you want to buy another house in the short term future?

 

[Zaphod]

q-school wrote:

does it affect your credit rating if you want to buy another house in the short term future?

 

Click to expand...

Yes it obviously will do that, but that is the trade off along with loss of the property you agree to by going through with the action. I've heard doesnt hit you that hard in reality. However, if we are talking about being as cynical and abusive of the rules as one could possibly be, you would put an offer and get a mortgage on a different place if you wanted to before starting a 'strategic' foreclosure.

I knew a friend of a nurse in our office that did this during the gfc. Its pretty shady, but its been done. You could also save up quite a large down payment with all the mortgage payments and no loans you now would owe combined with your normal pay checks.