In the summer of 2021, the Federal Housing Administration (FHA) took action to make it easier for borrowers with student loans to qualify for FHA single-family mortgages. Whether you think this decision is right or wrong, it can have a profound impact on how many student borrowers qualify for an FHA home loan, as well as how much money they can spend on a new home.
To understand the change, you first need to know how lenders looked at student loan payments to determine eligibility before now. According to Daniel Demian, a financial advice expert at AlbertFHA loan lenders have always looked at each applicant’s debts before they assign payment to each loan, credit card, or other debt they have. From there, lenders have historically compared your total debt payments to your income to make sure it is on their loan guidelines.
Generally speaking, lenders prefer to see debt-to-income ratios of 43% or less, which means that your total debt repayments are no more than 43% of your income.
“For someone earning $ 50,000 gross or $ 4,166 / month, that would bring your maximum allowable debt payments to $ 1,791 / month,” Demian explains.
However, the old FHA rules required FHA lenders to calculate student loan payments at 1% of the total student loan balance on loans that are not fully amortized or in the process of being paid off, he says. This means that a person with $ 100,000 in student loan debt would have a monthly payment of $ 1,000 recorded on their FHA loan application, regardless of what they actually pay each month. It’s easy to see why this could become a huge problem for student borrowers who pay less on their loans through income-based repayment plans or forbearance agreements.
The new rule backed by the Biden administration proposed that FHA lenders drop the requirement to calculate 1% student loan payments. Instead, they would use their student loan payment to determine eligibility for an FHA loan, Whatever.
Demian points out that if your payment is currently $ 0, lenders will take 0.5% of your total student loan balance as payment, which is half of what it was before.
A boom in FHA loans for student borrowers?
According to Andrew Pentis, a certified student loan advisor and student debt expert at Student loan heroThis is great news for student borrowers on the verge of home ownership who may have felt discriminated against during the mortgage application process.
This change could allow people with significant student loan debt to qualify for an FHA loan when they previously couldn’t, and we all know that FHA loans have been extremely helpful when it comes to ” expanding homeownership opportunities for people from all walks of life. living environments since 1934.
After all, FHA loans allow you to deposit as little as 3.5% of the purchase price, and they come with low closing costs compared to other mortgages. Best of all, these loans feature “easy credit eligibility”. In fact, you may be able to get an FHA loan with a credit score as low as 580.
Still, borrowers who want to get into the housing game now should plan to spend a pretty penny. the Estimates from the National Association of Real Estate Agents that house prices were up 23.6% year-over-year from May 2020 to May 2021. Additionally, homes nationwide sold in just 17 days on average. This means that you may have to pay more for the house you want, and you will have to act quickly if you have any hope of making a deal.
What to watch out for
In addition to being wary of high house prices, potential borrowers should note that this change will only help people who are currently paying less than 1% of their loan balances on their student loans each month. There are also many scenarios in which this change could put people in a difficult financial situation if they are not careful.
For example, Demian points out that people who suddenly have a lower debt-to-income ratio as a result of this change may be tempted to take out a larger mortgage or buy more homes than they can realistically afford. This usually means having to pay off your home loan for longer and paying more interest over time, but buying more home than you need can also result in higher long-term expenses for upkeep and maintenance. maintenance.
Pentis also stresses that this move will not suddenly prepare all student borrowers to lend their mortgages.
“Borrowers, like all consumers, need to review their entire financial situation before taking the big step of increasing their debt in the form of a home loan,” he says. “Before proceeding, families should make sure they have the necessary cash flow to manage both their student loan and potential mortgage payments.”
Specifically, future homeowners should think about the additional costs of owning a home over renting and how those costs impact their budget. For example, owning a home means spending money on property taxes, expensive home insurance premiums, maintenance and repairs.
From Remodeling magazine Cost vs Value Study 2021, replacing a roof has cost homeowners an average of $ 28,256 nationwide so far this year, and replacing a new wood window has cost an average of $ 23,219. If you can’t imagine paying for these kinds of repairs while covering your living expenses, student loan payments, and other bills, you may want to postpone homeownership, at least for a while. time.
The bottom line
Eligibility for an FHA loan may now be within your grasp if you have student loans, but that doesn’t mean you’re ready to own a home, or that you should go out and buy as many homes as possible. Whatever your financial situation, it’s always a good idea to sit down with pen and paper and write a monthly budget that takes into account all of your bills and expenses. If a new mortgage payment seems like it’s putting your finances at risk, you’d better wait until you make more money or have a bigger down payment or less debt to pay off.
It doesn’t matter what a mortgage lender says you can borrow, FHA loan or not. All that matters is what you determine what you can afford after paying your bills and saving money for retirement and other goals.