Buying real estate just got easier for newcomers with student loan debt

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Vladimir Vladimirov / Getty Images

Vladimir Vladimirov / Getty Images

The Federal Housing Authority is changing the way it calculates monthly student loan payments to make it easier first-time home buyersespecially for those living in communities of color to buy a home on an FHA mortgage backed by the federal government.

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When you apply for a mortgage, your lender uses a variety of calculations to determine how much you can borrow. One of them is the debt-to-income ratio. The US Department of Housing and Urban Development generally authorizes a DTI cap of 43% of gross monthly income, including mortgage debt, for FHA loans. This means that your total monthly debt payments, including revolving credit card debt, car loans, personal loans and even student loans, plus your new mortgage payment, should not be more than 43% of your gross monthly income.

For many potential home buyers with high student loan debt, this number represents a barrier to home acquisition. But by changing the way lenders calculate monthly student loan payments, more people may find they can afford to buy a home.

Previously, the FHA calculated student loan repayments as 1% of the outstanding loan balance in cases where this amount was higher than the actual payment – even if the loan was not fully repaid or is currently being repaid. This means that the actual payments on student loans can be significantly lower than what is indicated in the calculations.

See: How to Calculate Debt to Income Ratio
Find: Women and people of color count on student debt forgiveness the most

Under the new policy, the FHA will use the actual monthly student loan payment to calculate their DTI if the payment exceeds $ 0. Otherwise, the FHA will use 0.5% of the loan balance to calculate the DTI. “These changes remove unnecessary restrictions on creditworthy borrowers and strengthen the FHA’s ability to serve those who need us most, including first-time home buyers and low-income communities.” This was announced in a press release by the first deputy assistant secretary of state of the Federal Housing Administration Lopa Colluri.

On average, more than 80% of FHA-insured mortgages are for first-time home buyers, the press release said. And over 45% of these borrowers also have student loan debt. Research shows that student loan debt disproportionately affects black Americans and people of color. According to EducationData.org, black college graduates owe an average of $ 25,000 more than white college graduates. In addition, 48% of black students owe an average of 12.5% ​​more than they borrowed four years after graduation.

Lenders who guarantee loans secured by FHA can immediately implement a new calculation method to help more people with student loan quality for FHA mortgages. According to the press release, they must make changes for any FHA case numbers assigned on August 16 or later. The FHA assigns a case number to an active mortgage loan application after confirming the identifying information of the borrower and the home they are financing.

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