FHA Eases Underwriting for Student Loan Borrowers

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For many student loan borrowers, it has become easier to buy a home on an FHA mortgage now that politicians have abandoned policies that often required lenders to make conservative assumptions about the burden imposed on their monthly student loan payments.

The policy punished student loan borrowers who applied for an FHA mortgage if their monthly payments were suspended or if they were enrolled in a repayment program that allowed them to make reduced monthly payments. In these cases, FHA lenders were often forced to assume that the borrower’s monthly student loan payments were equal to 1 percent of their total outstanding student loan balance, even if their actual payments were less.

This meant that if you had a student loan debt of $ 29,000, average for 2019 graduates who borrowed to get their bachelor’s degree – and did not pay back the principal, FHA lenders were required to assume that your monthly student loan debt is $ 290. This calculation pushed many borrowers to exceed the maximum debt-to-income ratio (DTI) limit of the FHA, which made them ineligible for a mortgage.

FHA lenders can now use the borrower’s actual monthly student loan payment when calculating their total DTI – even if it is zero or does not repay the principal of their student loan. This could help tens of thousands of additional home buyers qualify for an FHA-insured mortgage for the first time.

The FHA estimates that more than 80 percent of insured mortgages are taken by first-time home buyers, and that 45 percent of these borrowers are also in arrears on student loans.

Lopa Colluri

“These changes remove unnecessary constraints on creditworthy borrowers and strengthen the FHA’s ability to serve those who need us most, including first-time home buyers and underserved communities,” said FHA Deputy Assistant Secretary General Lopa Collouri. statement

Lenders can voluntarily accept FHA’s new student loan policy right now, but must implement it by August 16th.

Announced ahead of the first federal holiday on June 19, it is hoped that the revised DTI calculation methodology will help black graduates who more likely to take up college, become homeowners.

Senator Sherrod Brown, Ohio

“Too many generations of black families have been denied access to affordable mortgages, owning their own homes, and amassing wealth to pass on to their children and grandchildren,” Senate Banking Chairman Sherrod Brown said in a statement. “I welcome HUD and [Housing Secretary Marcia] Fudge for this first step towards eliminating inequalities in our housing system and look forward to continuing to work together to expand access to home ownership and eliminate inequalities. ”

Laurie Goodman

“Changes in the DTI FHA methodology bring it more in line with Fannie Mae and Freddie Mac policies,” said Lori Goodman of the Urban Institute, co-author of the book. analysis requiring uniform handling of student loan debt among various federal mortgage programs.

“I think this is a really good move from the FHA and is long overdue,” Goodman told Inman. “There are many borrowers with disabilities who use the FHA because it is the lowest down payment program and a disproportionate number are minority borrowers. The FHA has no reason to be more harsh about them than Fannie and Freddie. “

How the impact of student loans on DTI is calculated

A growing number of student loan borrowers are participating in income related repayment (IDR) that allow them to make monthly student loan payments of just 10-15 percent of their discretionary income. Unless you have discretionary income – money left over after you’ve taken care of your essentials – your monthly student loan payment is zero.

In many cases, the monthly payments under the IDR are not fully amortized – they are too small to cover even all the interest due, or they have only a small impact on the loan principal. For this reason, borrowers in IDR plans may be eligible for loan forgiveness after 10, 20 or 25 years of repayment.

Fannie Mae

If the student loan borrower is registered with the IDR plan, Fannie Mae Lets Mortgage Lenders when calculating DTI, use the actual monthly payment – even if it is zero. If student loans are on a deferral or deferred basis, the lender must make a monthly commitment equal to 1 percent of the student loan outstanding balance, or a “fully amortizing payment,” that will repay the loan.

Freddie Mac

For student loan borrowers in IDR plans, Freddie Mac instructs mortgage lenders use the actual monthly payment if it is not $ 0. In this case, lenders are asked to make a monthly payment equal to 0.5 percent of the student loan balance, which would be $ 145 per month for a $ 29,000 student loan.

USDA

Last year USDA updated rules for calculating DTI for student loan borrowers who have deferred payments or are enrolled in an IDR plan. Lenders are instructed to calculate the monthly debt burden using the actual loan payment or 0.50 percent of the outstanding loan balance, whichever is greater. Therefore, it is assumed that a borrower who pays $ 90 per month under the IDR plan to pay off $ 29,000 in student loan debt would instead make payments of $ 145 per month.

Veterans Affairs Office

IN VA lender rules allow them to calculate DTI using the actual monthly student loan payment for borrowers participating in the IDR plan if it exceeds a minimum threshold of 5 percent of the loan balance divided by 12 months. Therefore, it is assumed that a borrower with $ 29,000 in student loan debt will have a monthly student loan payment of at least $ 121 ($ 29,000 * 0.05 / 12). If the actual payment is below the threshold, the lender can still use it in calculating the DTI if it provides a student loan service provider report that reflects the actual loan terms and payment information for each of the borrower’s education loans.

Extreme student loan debt

IDR programs are especially popular with advanced degree borrowers who often have even large student loan debt – An average of $ 65,000 for a master’s degree, $ 143,000 for a law degree, and $ 242,000 for a medical degree. For a borrower applying for an FHA loan, these debt levels were previously translated into an estimated monthly student loan burden of $ 650 for a master’s degree, $ 1,430 for a law degree, and $ 2,420 for a M.D. degree.

According to Department of Education Loan Simulator, a recent law graduate earning $ 60,000 a year as a public defender and paying $ 143,000 on student loans at an average interest rate of 6.6 percent, could qualify for a Public Service Loan Forgiveness after 10 years of monthly IDR payments. Payments will start at $ 341 a month, subject to an annual increase of 5 percent a year, and rise to $ 578 a month over a decade. After 120 monthly student loan payments, they will be written off a debt of $ 162,857.

A lawyer with the same debt and income, but working in private practice, is not eligible for forgiveness of a public service loan. But if they signed up for an IDR plan, they would also start making monthly student loan payments of $ 341. Assuming that their income grows 5 percent a year, their monthly payments would rise to $ 1,013 over 20 years, whereas they could expect to get $ 180,641 in unpaid principal and forgiven interest.

In any case, under the new FHA rule to calculate DTI, lenders can now use the hypothetical lawyer’s actual monthly student loan payment – $ 341 per month – instead of $ 1,430 (1 percent of their $ 143,000 loan balance).

Email Matt Carter



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