The Federal Housing Administration has lowered a relatively high bar it previously set on purchase mortgages with income-based student debt amortization plans.
On Thursday, the FHA announced that in the future it will calculate monthly obligations for those with earnings-adjusted payments based on 0.5% of the outstanding student loan balance. Lenders can opt for the change immediately, and it will become mandatory on August 16 for mortgages assigned case numbers by the FHA. Previously, the FHA had used 1% of the student loan outstanding in its debt to income calculation to determine if consumers could have qualified for a mortgage.
The change comes after roughly half of the 40 million people on student loan neglect due to the pandemic. It is also in line with the Biden administration's broader review of income-based student loan programs aimed at easing their terms.
Emmanuel Lewis, a loan applicant in Texas who struggled to obtain a home loan due to his student debt and financial problems related to a suspected fraud, said he was cautiously optimistic about the FHA change.
“Student loans gave me a higher interest rate when I was trying to refinance, and recently when I was trying to buy a house they were also credited to me. The higher cost of my home due to student loans also brings the risk of losing my home to a real estate program, ”he said in an email. "The changes in the student debt underwriting policy will allow more people to have a home at a lower cost."
The FHA has been cautious about the change in the past due to the risk it could pose to repaying a home loan. However, some mortgage managers believe that 0.5% is enough for a DTI calculation, as the 1% measure generally overestimates the size of the actual payments.
"Because of this, you shouldn't have to project a larger payment than the actual payment, and you increase the chances of a low- to middle-income family getting a home," said Don Calcaterra Jr., president of Michigan-based mortgage company Local Lending Group . Calcaterra is also the former chairman of the Community Home Lenders Association and a current member of the group.
The FHA standard was previously the strictest of any government agency and is now similar to that of Freddie Mac and the U.S. Department of Agriculture. (The Department of Veterans Affairs will use the payment terms documented by the Student Loan Administrator if the loan has been deferred for less than 12 months and Fannie accepts either a full amortization payment with documented loan terms or the 1% measure.)
"Those standards are now better aligned, which we are a fan of," said Pete Mills, senior vice president of the Mortgage Bankers Association.
The FHA change could help increase the relatively low home ownership rate for black households due to income inequalities, said Marcia Fudge, secretary for the Department of Housing and Urban Development and chairman of the Senate Banking Committee, Sherrod Brown, D-Ohio , in a press release Friday.
“Too many generations of black families are barred from getting an affordable mortgage, owning their own home, and building fortunes to pass on to their children and grandchildren. I commend HUD and Secretary Fudge for taking this first step to address inequalities in our housing system, ”said Brown.
Marcia Fudge, US Secretary for Housing and Urban Development (HUD), speaks during a Senate Fund Allocation Committee hearing in Washington, DC, USA on Thursday June 10, 2021. The hearing is titled "A Review of the President & # 39; s FY 2022 Funding Request ". and budget justification for HUD. "Photographer: Alex Wong / Getty Images / Bloomberg
Alex Wong / Bloomberg
"When our country comes together to remember June 10th and recognize National Homeownership Month, we are reminded of a fundamental truth: that the march towards freedom has too often in our history been a long, hesitant and uneven road," said Fudge. “Ownership is the cornerstone of the American dream and the best way to build intergenerational wealth. I am proud that the FHA is taking steps to make it easier for borrowers with student loan debts to qualify. "
Also in connection with the recent introduction of Juneteenth as an official national holiday, 100 organizations that joined forces on Friday under the umbrella of the Black Homeownership Collaborative outlined seven key areas that will be crucial for significantly reducing disparities by 2030. In addition to lending and lending, they include advice, down payment assistance, housing construction, sustainability, civil and consumer rights, marketing and public relations as well as sustainability.