HUD Seeks To Increase Home Ownership For Buyers With High Student Loans

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WASHINGTON. The Federal Housing Authority is softening its student loan debt assessment method when assessing eligibility for home buying assistance as the Biden administration tries to help lower-income borrowers and narrow the racial gap in home ownership.

The changes, which were presented in a letter to lenders late Thursday night, are intended to allow more borrowers to qualify for loans secured by the FHA, a division of the Department of Housing and Urban Development that provides mortgage insurance for beginners and lower-ranking individuals. -income home buyers.

Potential home buyers who qualify for FHA assistance generally have lower credit ratings than people with other government-backed loans, such as those guaranteed by Fannie Mae and Freddie Mac, and are disproportionately black and Hispanic, according to data compiled by federal regulators. bodies. The rise in student debt over the past two decades has coincided with historically low home ownership rates among young households. Some researchers say the phenomena are interconnected.

Loosening how it accounts for student debt will bring the FHA more in line with other government-backed mortgage programs such as Fannie and Freddie, which have also softened their criteria in recent years. The Biden administration is proposing an increase in the down payment for black homeowners and a number of other measures to fulfill the commitment to tackle racial equality in housing.

“This new policy will go a long way for people across our country and is another step in our mandate to promote equity and homeownership opportunities,” HUD Secretary Marcia Fudge said in a statement. Miss Fudge The changes are expected to be discussed at the Black homeownership event in Cleveland on Friday.

Prior to Thursday’s changes, the FHA program assumed that many borrowers made monthly payments equal to 1% of their outstanding student loan balances. Industry groups and consumer advocates say the method tended to overstate the borrower’s debt-to-income ratio and deprived creditworthy borrowers from eligibility for FHA loans.

Under the new policy, the FHA will ditch the 1% assumption in favor of a calculation that better reflects how much borrowers actually pay on a monthly basis. The change is a victory for groups like the Mortgage Bankers’ Association, which say current policies have imposed undue hurdles in the path of home buyers.

Alfreda Williams, Senior Home Ownership Advisor at HomeFree-USA, a mortgage consultant in Riverdale, Maryland, said many high-income people have been ineligible for FHA loans due to how their student loans are currently calculated.

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“This is really a problem for a lot of people now, especially people of color,” said Ms Williams. Minorities have disproportionately many loan problems in the past, she said, which could make it difficult for them to qualify for regular funding.

Dayrick Selvage, who manages research grants and contracts with a consulting firm and is looking for a home in the Maryland suburbs, is among those hurt by the way his student debt is calculated. With over $ 200,000 in student debt, Mr. Selvidge said he was disqualified for an FHA loan because the program assumed he was paying about $ 2,000 a month in student debt, which is much more than the roughly $ 370. which he actually pays.

Mr Selvage, 39, said he found a lender who would pre-approve him for a regular loan, but only through a process that would oblige him to waive down payment assistance for first-time home buyers. As a result, he would have to wipe out almost all of his down payment savings.

“It would mean entering the house without any financial cushion,” he said.

It is unclear how many FHA borrowers with large student loan balances will find it easier to buy a home under the new changes; HUD did not have a rating in the letter from the lender. In the short term, the effects are likely to be mitigated by the hot housing market. Many homes receive multiple bids and are sold at prices above their list price. FHA borrowers usually find it difficult to compete in such a frenzied market because they often compete with non-financing cash buyers who are more likely to be selected by sellers.

Thursday’s changes will better impact borrowers who have taken advantage of expanded student debt repayment options over the past decade that link monthly payments to their income. These options, known as income-based repayment, typically set monthly payments at 10% of “discretionary income,” which is based on a formula that includes adjusted gross income, and then spread the payments over 20 or 25 years, depending on the size of the balance. After this time, the government will cancel the balance on the balance sheet.

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Participation in income-driven student loan repayment plans has skyrocketed as many borrowers – especially those in graduate school – have more and more fund balances.

For some borrowers, their monthly payments on an income-driven plan are too low to cover the interest payments, let alone the principal. An agency spokesman said HUD expects its new formula to more favorably reflect these lower monthly student loan payments.

The changes should give recent graduates, “burdened with significant debt burdens,” a better opportunity to buy a home, said David Stevens, who led the FHA under the Obama administration.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

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