Mortgages Easier to Get With Deferred Student Debt
Last month, the Class of 2016 celebrated the end of school.
And while some new grads received cars, money and other exciting gifts, they
all received a great present from an unexpected source: the Federal Housing
Administration.
Effective June 30, the FHA halved the percentage used to
calculate monthly payment estimates for deferred student loans – that is, loans
not currently in repayment. This means that recent grads as well as first-time
homebuyers with student loans may now qualify for a mortgage.
FHA Loans
FHA loans are a popular option for first-time homebuyers.
The federal government insures these loans, allowing lenders to potentially
offer better deals, and the loans' down payments can be as little as 3.5
percent.
Earlier this year, the Student Loan Ranger dug into how
student loans affect eligibility for FHA loans. In short, quite a bit – lenders
want to evaluate how borrowers will handle their existing student loan debt
before giving them mortgage debt.
Lenders do this by looking at a borrower's debt-to-income
ratio. This helps them determine whether borrowers can handle a mortgage
payment based on their income and other financial responsibilities. More favorable
ratios equal a higher likelihood of being approved for a loan.
Debt-to-income ratios come in two varieties: front end and
back end. The front-end ratio only considers housing-related debts – mortgage payments. for example. The back-end
ratio looks at all recurring monthly debts, such as student loans. Currently,
the thresholds for FHA loans are 31 percent for front-end ratios and 43 percent
for back end.
One challenge lenders face when calculating the back-end
ratio is determining how to include deferred student loan debt. Because these
loans do not have a set monthly payment, lenders must estimate a monthly
amount. Like any estimate, this may not be accurate – especially if a borrower
qualifies for a low income-driven repayment amount.
Before the new guidance, lenders used 2 percent of the
outstanding debt as the standard for deferred loan amounts. This, by itself,
was a recent change, since lenders did not consider these payments at all
before September 2015.
Now, the FHA has sliced that 2 percent in half. This should
qualify more borrowers while still mitigating some risk for lenders.
Going from 2 percent to 1 percent may not sound like much.
But this small decrease could have a big effect for borrowers – especially
those with large debts.
The Class of 2016 follows the trend of graduating as the
most indebted yet. Estimates put the average debt per student at $37,173.
With the 2 percent calculation, that average amount when
deferred would have counted as $743. Now, that shrinks to $371.
This increases borrowers' purchasing power by that same
amount. Put another way, a lender could now approve these borrowers for a
mortgage that is $371 greater per month. For many, these amounts could be the
difference between owning a home or not.
But choose wisely. Education loan should not stand
in the way of your dreams, like buying a home. With this change, the FHA makes
this goal more attainable for some borrowers.
However, do not rely solely on a calculation when
determining whether buying a house is right for you. Take an honest look at
your debt, budgeting and spending and decide for yourself. Remember, you will
not only take on a mortgage payment but also all the other costs associated
with home ownership.
And, of course, just because a lender qualifies you for more
debt does not mean you should take on that amount. Many learned that lesson the
hard way – and hopefully history won't repeat itself.
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