FHA Changes Student Loan Calculation in Attempt to Boost Homeownership

The Federal Housing Administration has updated the way it assesses student loan debt in an attempt to allow more people to qualify for FHA-backed mortgages. The move comes as part of an effort to help more Americans become homeowners and narrow the racial gap in homeownership.

All lenders were required to implement the changes for FHA case numbers assigned on or after August 16, 2021.

A press release from the Department of Housing and Urban Development, the parent agency of the FHA, said, “This announcement enhances FHA’s ability to serve one of its core demographics—first-time homebuyers. Over 80 percent of FHA-insured mortgages are for first-time homebuyers on average each year. FHA estimates that more than 45 percent of these borrowers also have student loan debt, with much of this debt impacting people of color.”

Differences between the old calculation and the new one

Under the old calculation, FHA assumed that many borrowers were making monthly payments equal to 1% of their unpaid student loan balances, including loans that were in forbearance, deferment or in income-based repayment (IBR) programs that only require small payments. This 1% approach tended to inflate an applicant’s DTI and disqualified many otherwise solid borrowers from obtaining FHA financing.

The new calculation removes the 1% assumption and allows lenders to use the applicant’s actual monthly loan payments, making it easier for the applicant to get approved.

Here’s an example of the difference the change will make

Imagine an FHA applicant who has $100,000 in student loan debt and is paying $250 a month under an IBR plan. 

• Under the old 1% rule, FHA would assume the borrower’s monthly student loan payment was $1,000. This could easily throw off the DTI and disqualify the applicant.
• Under the new calculation, the borrower’s actual $250 monthly student loan payment is what gets factored in. 

The changes should give recent graduates, many of whom are burdened with heavy student loan debt because of rising education costs, a better opportunity to buy a home, said David Stevens, a former head of FHA. 

“Homeownership is the cornerstone of the American Dream, and the best way to build generational wealth. I am proud that FHA is taking action to make it easier for borrowers with student loan debt to qualify for a federally insured mortgage,” said HUD Secretary Marcia L. Fudge in a statement.

Sources

HUD Press Release
Forbes
Wall Street Journal
Business Insider