If You Have Student Loan Debt, It May Now Be Easier for You to Buy a Home
July 29th, 2021
July 29th, 2021
Are you shopping for a home with student loan debt? If so, there is good news for you. On June 17th, 2021, the Federal Housing Administration (FHA) announced that it is lowering student loan calculations to 0.5%.
You can view the official letter that announces the change here at HUD. According to the notice, “Mortgagees may begin using the policies announced in this ML immediately.”
Here is the language discussing the calculation of student loan debt from the notice:
For outstanding Student Loans, regardless of payment status, the Mortgagee
• the payment amount reported on the credit report or the actual
documented payment, when the payment amount is above zero; or
• 0.5 percent of the outstanding loan balance, when the monthly payment
reported on the Borrower’s credit report is zero.
In the past, the FHA set the calculation to 1%.
What Does This Mean for Me?
How does the change in the calculations help you if you are applying for a mortgage with student loan debt?
Giving an example, Forbes writes, “A federal student loan borrower with a $100,000 outstanding balance, an income of $60,000 per year, and a family size of 3 may only have a monthly payment of $245 per month under approved income-driven repayment plans. But an FSA-backed mortgage lender may ‘assume’ [under the previous rules] that the borrower actually has a payment of $1,000 per month due to the FHA’s longstanding underwriting rules that apply 1% of the outstanding balance.”
Clearly, being able to use $245 a month rather than $1,000 per month in computing your student loan debt payment requirements would make a huge difference when it comes to your debt-to-income (DTI) ratio.
Under what circumstances would the calculation use the 0.5% rather than the actual payment amount? Some examples might include situations with deferred student loans or student loans in forbearance. But 0.5% is only half as much as 1%, so you would still see a big improvement in your DTI ratio.
During your consult, we can also offer you other ideas for how to improve your DTI ratio.
Student loan debt does not have to stop you from moving into your dream home with an affordable home loan. Under the new FHA rules, your DTI ratio should be more competitive even with student debt, making it easier for you to qualify for a mortgage.
Have more questions about how these calculations work, or ready to apply? Please give us a call today at (317) 255-0062 to schedule your consultation.
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