The Federal Housing Administration is changing the way it calculates monthly student loan payments to make it easier to first time buyers, especially those from communities of color, to purchase a home with an FHA mortgage backed by the federal government.
When you apply for a mortgage, your lender uses many calculations to determine how much you can borrow. One of them is your debt to income ratio. The US Department of Housing and Urban Development has generally allowed a maximum DTI of 43% of gross monthly income, including mortgage debt, for FHA loans. This means that your total monthly debt payments, including revolving credit card debt, auto loans, personal loans, and even student loans, plus your new mortgage payment, should not exceed 43% of your monthly income. gross.
For many potential buyers with high student debt, this number represents a barrier to home ownership. But by changing the way lenders calculate student loan payments each month, more people can afford homes.
Previously, the FHA calculated student loan debt payments at 1% of the outstanding loan balance in cases where that amount was greater than the actual payment, even though the loan was not fully amortized or in the process of being paid off. This means that the actual student loan payments could be significantly lower than the calculations shown.
Under the new policy, the FHA will use the borrower’s actual monthly student loan payment to calculate their DTI as long as the payment amount is greater than $ 0. Otherwise, the FHA will use 0.5% of the loan balance for its DTI calculation. “These changes remove unnecessary strain on otherwise creditworthy borrowers and strengthen FHA’s ability to serve those who need us most, including first-time buyers and underserved communities. Federal Housing Administration Deputy Principal Under-Secretary Lopa Kolluri said in a press release.
On average, more than 80% of FHA insured mortgages are for first-time homebuyers, according to the press release. And over 45% of those borrowers also have student loan debt. Studies show that student loan debt disproportionately affects black Americans and people of color. Black college graduates owe an average of $ 25,000 more than white college graduates, according to EducationData.org. In addition, 48% of black students owe an average of 12.5% more than they borrowed four years after graduation.
Lenders who take out FHA guaranteed loans can implement the new calculation method immediately to help more people with quality student loan debt for FHA mortgages. They must implement the changes for all FHA case numbers assigned as of Aug. 16, according to the press release. The FHA assigns a case number to an active FHA mortgage application after it verifies the credentials of the borrower and the house they are financing.
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This article originally appeared on GOBankingRates.com: Home Buyers Just Got Easier For First-Time Home Buyers With Student Loan Debt