Late last week, the Department of Housing and Urban Development (HUD) announced that it is being more much more lenient on the rules mortgage lenders must use to assess student loan debt for home loan applicants. The move brings FHA more in line with other government-backed mortgage programs like Fannie and Freddie, which eased their criteria in recent years.
The new standard removes a requirement to calculate a borrower’s monthly student loan payment as 1% of their outstanding student loan balance instead of the actual monthly payment that could be significantly less than 1 percent of the balance.
Why the policy change?
The driving force behind the change is the push to help boost homeownership for buyers with student loan debt, as well as low-income and first-time buyers looking to secure federal government-backed loans (FHA loans).
According to the National Center for Education statistics, 77.7 percent of Black students borrow federal student loans to pay for higher education — significantly higher than the national average for all students (60 percent) and White students (57.5 percent).
The new relaxed standard is game-changing news for your clients because, in some cases, it could significantly increase their chances of qualifying for a mortgage loan –even for clients who may have been turned down in the past.
It’s great news for you, too, because the more clients you have that could benefit from these new standards, the larger your pool of potential buyers becomes. It’s a win for everyone!
Inside the numbers
HUD’s new rules are highlighted by removing the requirement that calculated a borrower’s monthly student loan payment as 1% of their outstanding student loan balance for loans that aren’t fully amortizing. That includes deferment, forbearance, or repayment plans.
That old standard meant that despite being approved for smaller monthly payments, borrowers were judged based on 1% of their outstanding loan, which is often a much higher number. That was an issue for some of your clients because it was enough to keep them from qualifying for an FHA loan.
Also, under the new standard, if your client’s student loan debt payment is $0 – which is possible under an income-driven repayment plan – the mortgage lender will automatically apply 0.5 percent of the unpaid student loan balance as an assumed payment rather than 1 percent in the past.
Here’s an example:
Under the old rules, say your client Klay Thompson has rolled up $100,000 in student loan debt. He’s paying $185 a month on that debt. However, when he previously applied for an FHA loan, the mortgage company assumed that he was paying $1,000 per month (1 percent) on that student loan balance.
Unfortunately, since the larger amount was taken into account for FHA loans instead of the actual payment he’s making, that could have been enough to disqualify him from being approved.
But under the new standards, Klay’s monthly debt calculation will be based on his actual payment – $185 – which is a far cry from the “assumed payment” of $1,000/month in the old scenario.
So instead of including $1,000 in your client’s monthly debt-to-income ratio (DTI), which includes all his monthly debt payments (student loans, credit cards, mortgages) divided by his pre-tax monthly income, only $185 is part of that tally.
That new math is excellent news for Klay and his family because it may be just enough to help them qualify for the FHA loan and finally buy their dream home. And you’re right there to help them through the process and earn a commission.
How to apply for an FHA Loan
FHA mortgage loans are designed for low- to middle-income families, who can qualify with a poor credit score and a down payment as low as 3.5 percent. They also allow for higher debt ratios, high seller concessions, and have more favorable interest rates than conventional mortgage loans.
If you have clients with student loans who may benefit from the new FHA loan standards, give us a call at 330-574-7348 or direct your client here to learn more.
Ackerman, A. (2021, June 18). HUD Aims to Boost Homeownership for Buyers With High Student Loans. The Wall Street Journal. https://www.wsj.com/articles/hud-aims-to-boost-homeownership-for-buyers-with-higher-student-debt-11624008602.
Minsky, A. S. (2021, June 21). Biden Administration Will Make It Easier For Student Loan Borrowers To Get A Mortgage. Forbes. https://www.forbes.com/sites/adamminsky/2021/06/21/biden-administration-will-make-it-easier-for-student-loan-borrowers-to-get-a-mortgage/?sh=8241acf1314e.
Federal Housing Administration Takes Steps to Remove Barriers to Homeownership for Those with Student Loan Debt: HUD.gov / U.S. Department of Housing and Urban Development (HUD). Federal Housing Administration Takes Steps to Remove Barriers to Homeownership for Those with Student Loan Debt | HUD.gov / U.S. Department of Housing and Urban Development (HUD). (n.d.). https://www.hud.gov/press/press_releases_media_advisories/HUD_No_21_103.