In the summer of 2021, the Federal Housing Administration (FHA) took steps to facilitate access to FHA single-family home mortgages for borrowers with student loans. Whether you think this step is good or bad, it can have a profound impact on how many student borrowers can qualify for an FHA home loan and how much money they can spend on a new home.
To understand the change, you should first understand how lenders have looked at student loan payments to determine eligibility so far. According to Daniel Demian, a financial advisor at AlbertLenders granting FHA loans always have each applicant’s debts checked before assigning a payment to any 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 in line with their credit guidelines.
Generally, lenders prefer a debt to income ratio of 43% or less, which means your total debt payments will not be more than 43% of your income.
“For someone making $ 50,000 gross, or $ 4,166 a month, that would mean the maximum debt payment allowed to be $ 1,791 a month,” Demian explains.
However, the earlier FHA rules required FHA lenders to calculate student loan payments at 1% of the total outstanding student loan balance for loans that are not fully amortized or repaid, he says. This means that someone with $ 100,000 in student loan debt will record a monthly payment of $ 1,000 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 are paying less on their loans through income-oriented repayment plans or deferral agreements.
The new rule, endorsed by the Biden administration, suggested that FHA lenders remove the requirement to charge student loan payments at 1%. Instead, they would be their actual ones Paying the student loan to determine eligibility for an FHA loan, Whatever it is.
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 the previous amount.
An FHA Loan Boom For Student Loans?
According to Andrew Pentis, a certified student loan advisor and student debt expert at Student loan hero, This is great news for student loan borrowers on the cusp of home ownership who may have felt discriminated against during the mortgage application process.
This change could be significant for those with Student Loan Debt qualify for an FHA loan when it was not previously possible, and we all know that since 1934, FHA loans have been immensely helpful in expanding home ownership opportunities for people from all walks of life.
After all, FHA loans you only have 3.5% of the purchase price deposited and are associated with low closing costs compared to other mortgage loans. Better still, these loans have a “basic credit rating”. In fact, you can potentially get an FHA loan with a credit score of only 580.
Still, borrowers who want to get into the real estate game now should budget a pretty penny. That National Association of Realtors estimates that from May 2020 to May 2021 real estate prices increased by 23.6% year-on-year. In addition, homes were sold in just 17 days on average across the country. This means you may have to pay more for the house you want and move quickly if you have any hope of a deal.
What to look out for
In addition to being wary of high home prices, prospective borrowers should also note that this change will only help people who are currently paying less than 1% of their loan balance monthly for their student loans. There are also some scenarios in which this change could place people in a difficult financial position if they are not careful.
For example, Demian points out that those who suddenly experience 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 reasonably afford. This usually means paying back your home loan longer and paying more interest over time, but buying more homes than you need can also lead to higher maintenance and upkeep expenses in the long run.
Pentis also advises that this move will not suddenly make every student loan borrower mortgage ready.
“Like all consumers, borrowers need to review their entire financial picture before taking the big step of adding a home loan to their debt,” he says. “Before proceeding, families should make sure they have the cash flow to manage both their student loan and possible mortgage payments.”
In particular, future homeowners should think about the additional costs of owning a home compared to renting and how those costs can affect their budget. For example, owning a home means losing money on property taxes, expensive homeowner insurance, maintenance, and repairs.
According to Remodeling Magazine Cost-benefit study 2021Replacing a roof returned homeowners an average of $ 28,256 this year across the country, and replacing a new wooden window cost an average of $ 23,219. If you can’t imagine paying for these types of repairs while also covering your living expenses, student loan payments, and other bills, you might want to put off the home – at least for a while.
The bottom line
Qualifying for an FHA loan may now be within reach if you have a student loan, but that doesn’t mean you are ready to own a home or that you should buy as much home as possible. Regardless of your financial situation, it always makes sense to sit down with pen and paper and create a monthly budget that takes into account all of your bills and expenses. If a new mortgage payment seems to be putting your finances at risk, you better wait until you have more money to make or a larger down payment or less debt to deal with.
It doesn’t matter what a mortgage lender says you can borrow, FHA loans or not. All that matters is what they Realize that after paying bills you can afford it and set aside some cash for retirement and other goals.