One of the greatest wealth generators in American society is homeownership. However, in recent years it has been extremely difficult for student loan borrowers to obtain a mortgage due to crippling student loan debt.
It isn't a surprise that student loan debt is crippling many individuals within the United States from building wealth. However, government entities such as the U.S. Housing and Urban Development and the Federal Housing Administration (FHA) have given new guidance that aims to make it easier for student loan borrowers to obtain a mortgage.
The New Federal Housing Administration Guidance
The Housing and Urban Development Office announced the new Federal Housing Administration (FHA) loan policy on Friday, June 18th, 2021. The office cites many statistics related to why a change to the loan policy is needed specifically to assist student loan borrowers.
They cited that over 80% of the FHA-insured mortgages are often first-time homebuyers on average each year, and more than 45% of the borrowers have student loan debt. In the current system, there are challenges as to how the FHA back mortgage lenders consider student loan debt.
The old system required FHA mortgage lenders to calculate a borrower's monthly student loan payment as 1% of their outstanding student loan balance, which isn’t an accurate depiction for some borrowers who are on income-based repayment plans. In hindsight, a change was needed to incorporate students with income-based repayment plans since these plans are fairly new in the loan industry.
The proposed changes will allow for FHA mortgage lenders to calculate a borrower’s debt-to-income ratio based on the borrower’s monthly student loan payment vs. a percentage of their total balance.
FHA Single Family Title II forward mortgages remove the current requirement that lenders calculate a borrower’s student loan monthly payment of one percent of the outstanding student loan balance for student loans that are not fully amortizing or are not in repayment.
In the HUD and FHA press release, they made a few convincing statements as to why these changes were needed at this time. Lopa Kolluri, Principal Deputy Assistant Secretary for the FHA, stated.
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.
Creditworthiness and other debts considerations did not change with the new updates, but many people are really excited about the impact of this new policy. This new guidance is a small but crucial step in the right direction to help millennials start building wealth through homeownership.