FHA Changes to Qualify for a mortgage with Student Loans

Millennials have two things in common, other than their age, they have student loan debt and they make up the primary market of first-time homebuyers.

Sometimes, they have a lot of student loan debt which affects their ability – or perceived ability – to remove their renter tag and add the homeownership badge.

American students borrow twice as much as they did two decades ago and the total student debt mountain has increased fourfold over that period. In 2012, students carried a median loan amount of $26,885 versus $12,434 two decades ago.

Student loan debt often weighs on students long after graduation too. Know any 40 year olds still paying off student loans? I do and that’s technically a different generation.

Recent graduates saddled with debt who want to buy a home will have to earn roughly one-third more annually (or $8,969 more, on average) than those who graduate from college without any student debt, according RealtyTrac.

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Luckily, those carrying the burden of higher education received some relief from HUD recently in the form of a relaxed FHA student loan debt obligation guideline.

From the horse’s mouth:

Mortgagees must use the guidance in Mortgagee Letter (ML) 16-08 for case numbers assigned on or after June 30, 2016.

The Mortgagee must include the monthly payment shown on the credit report, loan agreement or payment statement to calculate the Borrower’s debts.

If the credit report does not include a monthly payment for the loan, the Mortgagee must use the amount of the monthly payment shown in the loan agreement or payment statement.

If the monthly payment shown on the credit report is utilized to calculate the monthly debts, no further documentation is required.

If the credit report does not include a monthly payment for the loan, or the payment reported on the credit report is greater than the payment on the loan agreement or payment statement, the Mortgagee must obtain a copy of the loan agreement or payment statement documenting the amount of the monthly payment.

Calculation of Monthly Obligation – regardless of the payment status, the Mortgagee must use either:  

  • the greater of 1 percent of the outstanding balance on the loan
  • or the monthly payment reported on the Borrower’s credit report;
  • or  the actual documented payment, provided the payment will fully amortize the loan over its term.

 

If a student loan is not deferred, the debt is considered an installment loan and FHA will count the actual monthly payment for the obligation.

This includes the actual monthly payment for the obligation that is being paid under an income-based repayment plan, which may include an actual monthly payment of $0.

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I’m sure you are asking how is this “help” or “relaxed” guidelines?

Well, in the past underwriting required the use 2% of the balance on your deferred student loans to qualify for a mortgage. Assuming of course, that you were unable to produce a monthly payment statement that was good for at least 12 months prior to close. Now that is 1 percent.

This was a problem for many potential borrowers. Sallie Mae wasn’t exactly quick to respond and often lacked the information needed to avoid the 2% hit or the loan deferment was only “technically” good for 8, 9 or 10 more months.

It often resulted in undeferring and deferring again those student loan debts post mortgage closing. In some cases it meant not qualifying for a mortgage loan at all.

While the change might not seem like much, it presents a baby step in the right direction. Millennials are supposed to be buying more homes. One of the primary reasons they aren’t is simple – student loan debt.

Let’s hope that we continue to do more to address the student loan situation going forward. Imagine the economic and housing boost that would come from freeing up $8,900+ of annual disposable income for the largest demographic in America – Millennials.

There are 92 million Millennials in America. They carry $1.2 trillion in student loan debt. 60% of students have to borrow for a higher education and 7 million debtors are currently in default which essentially prevents them from buying a home even if wanted to.

Yet the industry pundits pontificate on why first-time buyers represent a historically low percentage of the market. They hem and haw on why Millennials aren’t buying more homes and how they can better target that market.

Millennials don’t need better marketing, they need institutional change. Until they get it, which I believe they will, we’ll continue to work hard to provide creative solutions and honest advice to those with student loan liabilities.

Thankfully, HUD took a baby step toward helping the problem with this recent FHA guideline change.

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