In 2021, there are 45 million borrowers who collectively owe approximately $1.7 trillion in student loan debt in the United States, making student loan debt the second highest consumer debt category as it surpassed both credit cards and auto loans.

 

On Thursday, June 17, the Federal Housing Administration (FHA) announced an updated policy for calculating monthly obligations for those with income-adjusted payments in deferment based on 0.5% of the outstanding student loan balance. The update aims to more closely align the FHA student loan debt calculation policies with other housing agencies, helping to simplify originations for borrowers with student loan debt. 

 

Lenders can opt into the change immediately, but it becomes mandatory for mortgages assigned case numbers by the FHA starting Aug. 16. 

 

Previously, the FHA had used 1% of the outstanding student loan amount in debt-to-income calculations to determine whether consumers with student loan debt could qualify for a mortgage.

 

Starting Aug. 16, for outstanding student loans, regardless of payment status, the Mortgagee must use:

• The payment amount reported on the credit report or the actual documented payment for payments above zero
• 0.5 percent of the outstanding loan balance, when the monthly payment reported on the Borrower’s credit report is zero 

Paving the Path to Homeownership For Those With Student Loan Debt

 

The recent policy updated for FHA Single Family Title II forward mortgages removes the current requirement for lenders to calculate a borrower’s student loan monthly payment of one percent of the outstanding student loan balance for those that are not fully amortizing or are not in repayment. 

 

Instead, the new policy bases the monthly payment on the actual student loan payment, which is often lower. The update helps homebuyers with student debt to meet the minimum eligibility requirements for an FHA-insured mortgage.

 

Historically, the FHA has been cautious to make the update due to the risk it could pose to the borrower’s ability to repay a home loan. Some mortgage executives, however, think 0.5 percent is sufficient for a DTI calculation because the previous 1 percent measure generally overestimated the extent of actual payments. 

 

The updated policy enhances the FHA’s ability to serve first-time homebuyers, which account for 80 percent of FHA-insured mortgages. The FHA estimates that more than 45 percent of first-time homebuyers have student loan debt. 

 

“These changes remove unnecessary constraints for otherwise creditworthy borrowers and reinforce FHA’s ability to serve those who need us most, including first-time homebuyers and underserved communities,” said Principal Deputy Assistant Secretary for the Federal Housing Administration Lopa Kolluri.

 

The FHA’s change could help boost relatively low levels of homeownership for minority households that stem from income disparities, said Marcia Fudge, secretary of the Department of Housing and Urban Development, and Senate Banking Committee Chair Sherrod Brown, D-Ohio, in a press release on June 18. 

 

The update comes after nearly half of the 40 million people with student loans went into forbearance as a result of the COVID-19 pandemic.