Boosting Homeownership for Buyers with High Student Loans: What You Need to Know
The Federal Housing Administration (FHA) just changed the way lenders calculate student loan debt for mortgage approvals. In the past, we had to assume borrowers were making monthly payments equal to 1% of their full debt balance. Now, the calculation is either what you’re really paying each month, or 0.5% of the full balance if the loans are in deferment.
This means that student loan borrowers have a better shot at being approved for a home mortgage. Let’s look at this example, federal student loan borrower with $80,000 outstanding balance, an income of $65,000 per year, and a family size of 3 may have a monthly payment of approximately $200 per month under approved income-driven repayment plans. With the plan that was in place, lenders would have to assume that the monthly payment is actually $800 per month due to the FHA’s underwriting rules that apply 1% of the outstanding balance. Now, lenders will only use the actual monthly amount unless a student loan calculated payment is $0, the mortgage lender will automatically apply 0.5% of outstanding balance as an assumed payment. This is important since qualifying for an FHA loan depends on monthly debt-to-income ratio (DTI), which is monthly debts divided by your pre-tax monthly income. FHA loans require the DTI to be 43% or less before qualifying, although other factors may influence borrower’s eligibility.
Applying for an FHA loan is designed for low-to middle-income families and can allow for qualification with a poor credit score and a down payment as low as 3.5%, depending on lender requirements.
This new policy is huge! It can make a big difference for individuals and promotes equity and opportunity for homeownership, and it is effective immediately. If you’re ready to start the journey of owning a home, reach out to the Jen Martinez Team to start the steps of pre-approval and let us help get you in contact with a local and reputable real estate agent to assist in the home search!
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