The Federal Housing Administration (FHA) recently created new FHA student loan guidelines that will make it easier for those with student loans to qualify for a mortgage. That is to say, the policy will change how FHA mortgage lenders are required to calculate a borrower’s monthly student loan payment.
Changing How Lenders Calculate Monthly Student Loan Payments
FHA-backed mortgage lenders currently must calculate a borrower’s monthly student loan payment as 1% of the outstanding balance of their student loans. This includes loans that are not fully amortizing or are not in repayment. Mortgage lenders apply this calculation to all borrowers, regardless of what their actual payment is.
Borrowers in approved deferment or forbearance are subject to the 1% rule. Similarly, this policy applies to borrowers who are under an income-based repayment plan and have relatively small monthly payments.
FHA Student Loan Guidelines Impact on Borrowers
The calculation that FHA mortgage lenders have traditionally used to determine a student loan borrower’s monthly mortgage payment can reduce a borrower’s chance of getting approved for a loan. For example, a federal student loan borrower with an outstanding loan of $100,000 and a $65,000 annual income. This borrower uses an income-driven repayment plan and makes a monthly payment of $275.
Due to the longstanding FHA student loan guidelines for calculating monthly student loan payments, an FHA-backed mortgage lender would not calculate $275 for the borrower’s monthly payment. Instead, they would apply 1% to the borrower’s outstanding loan balance. Thus, they would assume a $1,000 monthly student loan payment for that borrower.
In this case, rather than using the borrower’s actual monthly payment, the borrower assumes a much higher monthly payment of $1,000. Unfortunately, applying the 1% calculation might prevent the borrower from getting a mortgage.
Changes to the FHA Student Loan Guidelines
The new FHA student loan guidelines will change the calculation that many FHA mortgage lenders use to calculate a borrower’s monthly student loan payment. Therefore, mortgage lenders will stop using the traditional 1% of the borrower’s outstanding loan balance. The mortgage lenders can use a borrower’s actual monthly student loan repayment amount. This applies to all borrowers whose monthly loan repayment is below 1% of their total loan balance. An exception is for borrowers who have a $0 monthly loan payment.
Borrowers under an income-driven repayment plan can have a $0 monthly loan payment. In this scenario, the mortgage lender won’t use the actual payment of the lender. Instead, they will assume the payment of 0.5% of the outstanding student loan balance.
Making Homeownership More Equitable
The FHA’s new policy for calculating a borrower’s monthly student loan repayment has significant consequences. Advocates of the policy praise it for promoting equity for homeownership. Additionally, they say it is an important step to increase opportunities for Black student loan borrowers to qualify for a mortgage and to start building generational wealth.
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