FHA recently announced new guidance for new applicants that have student loans. The new guidelines help to remove obstacles and provide more access to affordable single-family FHA-insured mortgage financing for creditworthy home buyers that have student loan debt. This is great news since the majority of the FHA loan applicants are first-time buyers with already tight debt-to-income ratios.
The updated policy more closely aligns FHA student loan debt calculation policies with other housing agencies, helping to streamline and simplify originations for borrowers with student loan debt obligations.
The policy change removes the current requirement that FHA-approved lenders calculate the applicant’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 includes borrowers who are currently in deferment plans or loan forbearance, or who are only required to make relatively small payments under an income-based repayment plan.
For example, a home buyer has a $75,000 outstanding balance on their student loan, an income of $65,000 per year, and may only have a monthly payment of $195 per month under an income-driven repayment plan. However, the mortgage company must assume that the home buyers actually make a payment of $750.00 per month due to the previous underwriting rules that apply 1% of the outstanding balance. This rule could prevent a borrower from qualifying at all depending on their other debt obligations. At a minimum, it would greatly reduce their loan qualifying amount
The newly updated FHA student loan guidelines 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. If the applicant’s student loan payment is calculated to $0 (which can happen under income-driven repayment plans), the lender will automatically apply 0.5% of the outstanding student loan balance as an assumed payment, rather than 1%.
Again, this is great news and especially helpful for first-time home buyers that traditionally have tighter debt-to-income ratios.
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