Ask most young people about their goals in life and the majority will include home ownership. Those same people will typically have college education on their radar. But on September 14, 2015 the Federal Housing Administration (FHA) promulgated new guidelines for its Single Family Housing Policy Handbook that may hinder those goals for potential borrowers with student loan debt.
Mortgage Application Requirements
As with any loan application, the lender and underwriter must take a close look at your finances. This includes an examination of your debt to income ration, or “DTI,” your minimum monthly debt divided by your gross monthly income. Prior to the rule changes that took effect on September 14, 2015, qualifying for a home loan was easier if you had student loan debt for a number of reasons. Before the changes, any of your student loans that were in deferment for at least 12 months were excluded from your DTI.
Now those same loans are no longer excluded. In fact, if you carry student loan debt that is in deferment and the future payment cannot be determined, 2% of the total remaining balance of the debt will be calculated as part of your DTI ratio. If the loan is in deferment and the future payment is ascertainable, then that future payment amount will be used in the calculation. If your student loan is not in deferment, then your actual payment is used in calculating the DTI. This makes the calculation of deferred student debt with an undetermined future payment higher on an FHA loan product than the figure used in a Fannie Mae or Freddie Mac loan at 1%. Be aware that if your ratio ends up higher than 43-45%, you probably will not qualify for a loan. Lenders generally see anything above this percentage as too large a risk.
Why have the rules changed?
The FHA is part of the U.S. Department of Housing and Urban Development or HUD. HUD’s purported mission is creating “strong, sustainable, inclusive communities and quality affordable homes for all. HUD is working to strengthen the housing market to bolster the economy and protect consumers.” So why, then, would the FHA impede the process for potential buyers who made the enlightened decision to further their education and needed financial assistance to do so?
Simply put, the FHA is trying to protect the borrower from unanticipated financial struggles down the road. By including a student loan debt that will ultimately factor into the applicant’s monthly budget during the life of the mortgage, the FHA hopes to protect rather than punish the homebuyer. According to FHA spokesman Brian Sullivan, the new rules on student loan debt are meant to provide the borrower with “a path of sustainable homeownership rather than being placed into a financial situation they can no longer afford once their student debt deferment expires.” While this is a noble goal, in the short term there are likely to be negative consequences for those first time home buyers who have deferred student loans with a substantial payoff amount.
Getting A Loan
What can you do to help improve your chances of loan approval with the new FHA rules? Do what you can with what you have. First, take steps to clean up your credit history. Pull a copy of your credit report for free and review it. Make adjustments to improve any problem areas. That may involve paying off old accounts, modifying loans, and correcting errors on the report. Remember that this process takes time, so you should start will before you intend to begin the homebuying process. Though it is always wise to check your credit and start making adjustment well in advance of when you intend to begin your loan application process.
You can improve your chances and your score by making payments on time. Pay more than the minimum if possible. Try to pay down revolving accounts like credit cards or personal lines of credit. The more debt you eliminate, the lower your DTI will be, even with the inclusion of your student loan debt. Also, keep in mind that the FHA changes its guidelines frequently.
In addition, mortgage lenders change their policies frequently. Check in with your mortgage broker regularly to learn about the most current provisions for all types of loans for which you qualify. Ask about any rules that affect your current situation or any potential changes to rules. When the FHA is going to make changes to its guidelines you will find the proposed rule changes on the HUD Federal Registers.
A Mortgage Warrior Can Fight For You
It’s tough to fight a bank or other big financial institution on your own. The experienced Mortgage Warriors can help you learn more about your options, find ways to make the home loan process easier, and negotiate with your lenders.