The one constant in the residential mortgage business is change. You can always count on it just like the four seasons experienced here in the Midwest. Back on July 7th I did a blog post that highlighted several big changes going into effect for Fannie Mae backed mortgages (you can read that article here). These changes were welcomed by industry participants as they were designed to make it easier for borrowers to qualify.
Unfortunately this is not the case with the change coming to the Federal Housing Administration (FHA) loan program on September 14th. The change, which has to do with FHA’s guidelines on deferred student loan debt, will ultimately result in less borrowers being able to qualify for a FHA loan.
To explain, under current FHA loan guidelines, when a borrower has student loans that are in deferment for at least 12 months past the closing date, the associated monthly payments can be excluded for qualifying purposes. Excluding these monthly payments often times drops the borrower’s overall debt-to-income (DTI) ratio down so that it falls more in line with what is considered reasonable. This is an extremely beneficial feature of the FHA loan program, especially in today’s lending environment in which many people looking for home financing are Millennials–a generation that carries more student loan debt than any generation in the past.
However, starting on September 14th, FHA guidelines will no longer allow deferred student loans to be excluded for qualifying purposes. Instead, when the monthly payment for any student loan account shows as being $0 or not available on the borrower’s credit report (which is indicative of the loan being in deferment), the lender must utilize 2 percent of the outstanding loan balance to establish the monthly payment.
To understand the significance of this change, consider a borrower with a $10,000 student loan of which is in deferment at least 12 months past the date they wish to close on their home purchase. Under FHA’s current guidelines, the lender would be allowed to use $0 as the monthly payment on this loan for qualifying purposes. Under FHA’s new guidelines, the lender will instead have to use $200 as the monthly payment amount (2% of the $10k loan balance), which could easily cause the borrower’s DTI ratio to fall outside the qualifying range. So as you can see, the impact of this change will be felt by many of prospective homebuyers out there who may be saddled with student loan debt.
If you are one of the many people who could potentially be affected by this change, I highly recommend speaking with an experienced mortgage professional to discuss what impact (if any) it may have on your chances of qualifying for a FHA loan and/or what options might be available to you.
Thanks for reading!