If you are like many other prospective homebuyers with student loans, you know how stressful the process can be.
While student loans alone cannot prevent you from getting a mortgage, the effect of the student loans on your debt-to-income ratio is the key deciding factor for lenders.
However, there is good news for you as a potential homebuyer carrying some student loan debt! Two weeks ago, the Federal Housing Administration (FHA) announced updates to calculations related to student loan payments which are designed to prevent borrowers’ debts from being overstated. This should make borrowers more creditworthy and boost their chances of getting a mortgage.
The new policy will help homebuyers with student debt meet the minimum eligibility requirements for an FHA-insured mortgage, making it easier for many families to purchase a home.
So, how will student loan debt now be calculated?
Previously, FHA mortgage lenders would calculate a borrower’s monthly loan payment as 1% of their outstanding balance for loans that are not in repayment including borrowers in approved deferment and borrowers under income-driven repayment plans. This has the possibility of resulting in an overstatement of debts for a borrower, making their debt-to-income ratio less favorable.
The new calculations remove the 1% rule and allow lenders to use borrowers’ actual monthly loan payments making it easier for a borrower to get a mortgage application approved.
Lenders can now accept either the payment amount reported on the credit report or the actual documented payment when the payment amount is above zero, or calculate it with 0.50 percent of the outstanding loan balance when the monthly payment reported on the borrower’s credit report is zero.
How will this affect homebuyers with student debt?
Aside from aiding the entire community of homebuyers with student loan debt in improving their chances of getting a mortgage, this change also specifically helps borrowers of color.
The FHA estimated that more than 45% of its first-time homebuyer demographic has student loan debt, with a large portion of that debt falling on borrowers of color.
The student debt crisis in the United States is steadily worsening this issue. Thirty-six civil rights organizations released principles for student debt cancellation in April that “will help Black and brown borrowers build wealth and enable our economy to move forward as millions of Americans are able to start families, buy homes, and set up small businesses.”
They noted that upon graduation, Black borrowers typically owe 50% more than white borrowers, and after four years, Black borrowers owe 100% more. The new FHA calculations aim to ensure the disproportionate burden of student debt does not cut out Black borrowers from the ability to own a home.
When will the changes go into effect?
The new student loan calculation requirements are effective immediately for loans in the pipeline, which are not yet closed, here at Southern Trust Mortgage. The changes must be applied to FHA case numbers assigned on and after August 16th, 2021.
That being said, because of the changes made by the FHA getting approved for a mortgage with student loan debt is now much easier. In announcing the change, the FHA says it enhances the organization’s ability to serve first-time homebuyers, their largest demographic. This is a step forward and will help a massive portion of prospective homebuyers who carry student loan debt achieve their goal of homeownership.