With more than $1.75 trillion in student loan debt in the United States, borrowers are hunting for forgiveness opportunities. Although some forgiveness is offered to teachers and public servants in certain positions, these options are not available to everyone, leaving many looking for a solution.

Student loans prohibit borrowers from making significant life decisions, such as putting in a down payment for a home. Luckily, borrowers interested in homeownership can take advantage of a student loan cash-out refinance program. This program offers homeowners the flexibility to pay off high-interest student loans while potentially refinancing to a lower mortgage interest rate.

Although this program isn’t exactly a forgiveness program, it does allow borrowers to wrap student loans and mortgage payments into a single payment at a lower interest rate.

In this blog post, we break down this student loan cash-out refinance program to help you determine whether or not it is right for your situation.

What Is a Cash-Out Refinance Transaction?

Since 1970, average student loan debt has increased by more than 300 percent. With an average of more than $30,000 in student loan debt per graduate, it’s no wonder borrowers are looking for student loan forgiveness programs. In addition to the programs we mentioned above, new alternatives are emerging, such as state mortgage programs that offer some or total debt relief.

One of the more common student loan relief options is through student loan cash-out refinance programs. These programs are similar to a traditional cash-out refinance transaction, which allows mortgage holders to replace an old mortgage with a new one that has a larger amount than owed on the previous loan. This helps borrowers use their home mortgage to gain access to cash.

For those who want to pay off student loans, a student loan cash-out refinance is essentially the same as a cash-out refinance program, but the extra cash from the new loan pays off student loan debt.

Highlights from Student Loan Cash-Out Refinance Programs

Student loan cash-out refinance programs allow student loan debt repayment through a home loan refinance. To be eligible, at least one student loan must be paid off by sending funds to the student loan servicer at closing.

Unless stated otherwise, all other standard cash-out refinance requirements apply.

Additional Uses of the Cash-Out Refinance

Although the primary use of this cash-out refinance program is to pay off student loan debt, the loan can also be used in other ways. If the borrower doesn’t want to pay off the entirety of their student loans, they can choose to pay off other mortgage-related debt. For example, borrowers may choose to pay off:

  • An existing first mortgage loan.
  • A loan to cover costs on a new construction home.
  • Closing costs, points, and prepaid items, not including real estate taxes that are more than 60 days delinquent.
  • Subordinate liens used to purchase the property or included in the new mortgage.

Additionally, the borrower may receive cash back if the amount is not more than 2 percent of the new refinance amount, or $2,000. The borrower may also be refunded by the lender if they accrued overpayment of fees through federal or state laws or regulations.

Additional Information

To receive the benefits of a student loan refinance program, the loan must be underwritten by Desktop Underwriter® (DU®), an underwriting system that Fannie Mae often uses and, in some cases, the Federal Housing Authority. Although DU does not identify these transactions, it will send a message when it appears that student loans are marked paid by closing. This message will inform lenders of the loan requirements, but the lender must confirm that the loan meets all requirements outside of the DU.

Talk to a Loan Officer About Student Loan Cash-Out Mortgage Requirements

At Freedmont Mortgage Group, we don’t think home buying has to be difficult. And we definitely don’t think you should have to put your dreams of homeownership on hold because of student loans.

If you’re interested in learning more about student loan cash-out refinance options—including a student loan refinance program—reach out to Freedmont Mortgage Group. We would be happy to give you more information.