FHA mortgages continue to be a popular financing option among consumers due their increased down payment and credit flexibility. But with the cost of college becoming much more expensive, student loan debt is still a relevant barrier to homeownership for some consumers.
According to the Wall Street Journal, around 44 million American owe a combined total of $1.6 trillion in student loan debt1. As debt continues to pile up while lenders simultaneously tighten lending requirements, it can be hard for anyone to qualify for a new mortgage.
Thankfully, the U.S. Department of Housing and Urban Development (HUD) has issued new guidance that will provide some assistance to borrowers with outstanding student loans. These new requirements come at a time when demand for homeownership is nearing a peak.
Ultimately, the new guidance should allow more borrowers to qualify for FHA mortgages. If you have been discouraged from applying for a mortgage because you feel you have too much student loan debt or have previously been denied a new home loan for excessive credit obligations, here is how the new FHA student loan guidelines might benefit you.
Background and Current FHA Requirements
Prior to the implementation and publication of the HUD 4000.1 handbook, there was a lot of ambiguity surrounding student loans and how they should be treated.
In fact, FHA policy failed to clarify treatment of deferred student loans entirely. There was also little direction given with respect to student loans on an income-driven or specialized repayment plan.
Eventually the agency adopted a policy to require lenders calculate the payment for files with deferred student loans using 2% of the outstanding balance2. However, between April and July of 2016, the policy was changed to break out student loans from other types of installment debt and apply new underwriting requirements2.
The payment calculation was amended to align more with the Fannie Mae policy, stating that either the greater of 1% of the outstanding balance or the monthly reported payment on the borrower’s credit report must be used to qualify2.
The only exception was that if lenders could document the actual payment, showing that it was fully amortized, that would also be sufficient.
New Guidance for Treatment of Student Loans
Effective for all FHA loan applications with case numbers assigned on or after August 16, 2021 (although lenders can implement the new changes immediately), the guidelines for the treatment of student loans have now been revised to make it easier for you to qualify for a new FHA mortgage2.
For outstanding student loans, regardless of their status, your lender is now required to use the actual payment amount reported to the credit bureau or 0.5% of the outstanding student loan balance when no monthly payment is present or is zero2.
Alternative to using the payment listed on your credit report, you can provide your lender with a copy of your loan statement, credit agreement, or equivalent documentation to document the lower payment that can be used for qualification (so long as the payment is not zero)2.
This policy adjustment more closely aligns with Freddie Mac’s current guidelines and treatment of student loans and can have a beneficial impact to your calculated debt-to-income ratio.
Furthermore, lenders can now exclude your student loan payment from your monthly DTI calculation if you can provide documentation form your servicer, program administrator, or creditor that the loan balance has either been forgiven, cancelled, discharged, or paid-off2.
Younger buyers (notably Millennials between the ages of 22-40) make up approximately 37% of all homebuyers and are some of the most likely candidates to have higher levels of student loan debt3.
Similarly, the intent of the recent policy changes is to also help bridge unequal access to credit among certain populations.
For example, the National Center for Education Statistics (NCES) found that nearly 78% of black students use federal student loans to pay for higher education4. This is much higher than the national average which is closer to 60% across all student4.
These changes come at a pivotal time when mortgage rates remain near all-time record lows, allowing more opportunity for borrowers to purchase a new home or qualify for new credit terms by refinancing.
1 Munk, C. W. (2020, October 02). What to Do if Your Student Loans Make It Hard to Get a Mortgage. Retrieved July 21, 2021, from https://www.wsj.com/articles/what-to-do-if-your-student-loans-makes-it-hard-to-get-a-mortgage-11601631001
2 Student Loan Payment Calculation of Monthly Obligation (Issue brief No. 2021-13). (2021, June 17). Retrieved July 21, 2021, from U.S Department of Housing and Urban Development website: https://www.hud.gov/sites/dfiles/OCHCO/documents/2021-13hsgml.pdf
3 2021 Home Buyers and Sellers Generational Trends Report (Rep.). (2021, March 16). Retrieved July 21, 2021, from National Association of Realtors Research Group website: https://www.nar.realtor/sites/default/files/documents/2021-home-buyers-and-sellers-generational-trends-03-16-2021.pdf
4 Minsky, A. S. (2021, June 29). Biden Administration Will Make It Easier For Student Loan Borrowers To Get A Mortgage. Retrieved July 21, 2021, from https://www.forbes.com/sites/adamminsky/2021/06/21/biden-administration-will-make-it-easier-for-student-loan-borrowers-to-get-a-mortgage/?sh=7994bee21314