Getting a first mortgage with student loans just got easier

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If student loan debt has delayed your dreams of home ownership, a recent change could make it easier to qualify for one FHA Home Loans.

the Federal Housing Administration updated how lenders are required to calculate student loan debt with FHA loans. The goal is to eliminate student debt as an entry barrier to obtaining an FHA home loan — the FHA says more than 45% of first-time borrowers have student loan debt, and previous policies have had a particularly negative impact on people of color.

The amendment has the potential to increase access to FHA-backed mortgages for underserved communities and those with student debt — and some previously ineligible borrowers could now be eligible under the amendment. The people who benefit most are lower-income, heavily indebted borrowers, she says Catalina KaiyoorawongsCo-founder of student debt financial wellness platform LoanSense.

What this change means for you:

Getting an FHA loan just got easier

For loans not in active repayment (forbearance, forbearance, income-related amortization schedule), the guidelines previously, FHA required mortgage lenders to calculate a borrower’s monthly student loan payment 1% of the total loan balance. This amount was then factored into the debt-to-income (DTI) ratio, negatively impacting borrowing potential.

For example, a borrower may have a total balance of $100,000 in student loans. However, they may have an approved income-based repayment (IBR) plan that contributes as little as $150 per month. Under the old policy, the FHA lender would have to budget $1,000 per month based on the underwriting rule of 1% of the balance.

Now anyone using an income-based repayment plan can include the actual dollar amount they pay in their DTI as long as the payment is above zero dollars per month. And if your student loans are deferred or deferred, or your monthly IBR payment is zero, 0.5% of your student debt counts towards your DTI.

Like most loan programs, FHA loans have a Debt-to-Income (DTI) limit. DTI is the main factor lenders use to determine how much they are willing to loan you, and student loans form part of that assessment. This includes your current monthly debt payments and your future mortgage payments.

Those changes must be implemented by Aug. 16, the FHA says, although lenders are also allowed to implement them immediately.

How it works

In most cases, the maximum allowable DTI on an FHA loan is 43% of your monthly income. To calculate your DTI, take your debt payments and divide that number by your gross monthly income (before taxes).

Here is an example scenario of how a prospective FHA borrower in an income-based repayment plan would be affected by the old and new guidelines:

old way

Monthly debt (car and credit card payment) $450
IBR Monthly Student Loan Payment $150
Monthly income $3,500
Total student loan amount $100,000
Used to calculate monthly student debt $1,000/month (1% of loan)
Total monthly debt used in DTI $1,450/month
DTI ($1,450/$3,500) 41.42%

New way

Monthly debt (car and credit card payments) $450
IBR Monthly Student Loan Payment $150
Monthly income $3,500
Total student loan amount $100,000
Used to calculate monthly student debt $150/month (actual payment)
Total monthly debt used in DTI $600/month
DTI ($600/$3,500) 17.14%

In the example above, the reduction in DTI ratio is significant and can make a big difference in skill potential. The change may also affect how much you can borrow. Lowering the DTI also increases home buying purchasing power.

Who Can Benefit from the New FHA Loan Eligibility Rules?

Potential Home Buyers

For buyers, this change can mean two things:

  1. You could qualify if you couldn’t before
  2. You might be eligible for a larger mortgage

But for those looking to buy a home, it’s a tough market right now no matter what type of loan you get. Low housing stock and exceptionally low mortgage rates created and caused bidding wars house prices to rise. While the change could make it easier for first-time homebuyers to get an FHA loan, it’s unlikely to be a major game changer.

“It will be interesting to see how this change plays out in the market over the next three to six months,” he says Matthew garland, Senior Vice President at Garland Mortgage Group and co-host of real estate podcast Rants & Gems. “I think this will continue to fuel the seller’s market and continue to drive home prices up nationwide.” In other words, the challenge of finding an affordable home and accepting your offer will likely continue.

It is therefore particularly important to have one household budget and hold on to it. Banks are often willing to lend buyers far more than makes sense for people’s monthly budgets. Because of this, it’s important to focus on what you can afford, not just how much a lender is willing to give you. FHA loans have a maximum DTI of 43%, but when certain “compensation factors” are taken into account, such as B. your deposit or cash reserves, you can qualify with an even higher DTI.

pro tip

The maximum DTI for an FHA loan is 43% or more, but many experts suggest leaving your DTI at 36% or less because the 43% doesn’t account for other everyday expenses.

Another important note: your DTI doesn’t take all of yours into account monthly expenses, such as taxes, groceries, gas, maintenance costs and unexpected medical bills. This is why some experts recommend you to follow them 28/36 rule. This rule states that your mortgage payment should be no more than 28% of your pre-tax monthly income, and all of your debt payments (including your mortgage) should be no more than 36% of your gross monthly income.

Potential refinancers

If your student loan debt was the only thing stopping you from refinancing into a new FHA loan, then it’s worth checking out how much you can save now. “For people looking to refinance, this is a home game,” says Garland. “If they’re on this income-based repayment plan, we can use that payment to help them qualify and now they can make a repayment and get a lower interest rate.”

Remember you are paying closing costs from 3% to 6% of the balance if you refinance. And FHA loans have an additional mortgage insurance prepayment equal to 1.75% of the mortgage balance on top of the ongoing mortgage insurance payments.

Compare the refinancing options you qualify for before deciding if one Refinance FHA is the right option for you. You should also be sure you’re staying indoors long enough to see any potential savings exceed the refinancing costs.

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