Some great news was recently announced for home buyers that have student loans. FHA along with the Biden administration is easing FHA lending rules to give borrowers that have student loans a better chance of qualifying for a home loan.
The Federal Housing Administration (FHA) announced changes to its student loan calculations that should make it easier for student loan borrowers to obtain lender approval. The new guideline change basically removes the current requirement that FHA mortgage companies calculate a borrower’s monthly student loan payment as 1% of their outstanding student loan balance for loans that are not fully amortizing or are not in repayment.
This also includes home buyers that are in an approved deferment or forbearance program, or who are only required to make small monthly payments under an income-based repayment plan.
For example, a student loan borrower with a $50,000 outstanding student loan balance, an income of $45,000 per year, may only have an actual monthly payment of $150 per month under approved income-driven repayment plans. But under the current rule, an FHA-approved lender has to assume that the borrower actually has a payment of $500 per month due to their underwriting rules that apply 1% of the outstanding balance.
This can often prevent many borrowers from getting approved for a mortgage, depending on their overall credit profile and other monthly debts. Imagine the impact on debt-to-income ratios for borrowers that have $100,000 or $200,000 in student loans.
The newly revised FHA guideline will allow lenders to use a home buyer’s actual monthly student loan payment amount, even if it is below the traditional amount of 1% of the total balance. And if a student loan is calculated at $0 (which often happens under an income-based repayment plan), the mortgage lender will automatically apply 0.5% of the outstanding student loan balance as an assumed payment, instead of the old 1%.
How does this rule change help so many borrowers with student loans? FHA, like VA, Conventional and USDA loans have debt-to-income (DTI) ratio limits for housing expenses, plus all other monthly debts. This will have a positive impact on many borrowers by keeping their overall DTI calculation lower, thus helping them qualify for more.
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