A recent change in your circumstances could help you qualify for an FHA loan if student loan debt has impeded your dream of owning a house.
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Federal Housing Administration has updated its guidelines for lenders on how to calculate student loan debt when calculating FHA loans. FHA loans are now available to borrowers who have student loan debt. The FHA states that more than 45% of first-time borrowers have this debt. People of color were particularly affected by the old guidelines.
This change could increase access to FHA mortgages for those in underserved areas and students with student debt. Some previously ineligible borrowers may now be eligible. People with low incomes and high debt are the ones who will benefit most, according to Catalina Kaiyoorawongs (co-founder of LoanSense, a student debt financial wellness platform).
This is what this change means to you?
- It’s now easier to get an FHA loan
FHA mortgage lenders were required to calculate the monthly student loan payment for loans that are not in active repayment using 1% of total loan amount. This was used to reduce borrowing potential by incorporating the amount into their debt-to income (DTI).
A borrower might have $100,000 in student loans. They may also be eligible for an approved income-based repay plan (IBR), which contributes only $150 per month. The old guideline required that the FHA lender factor in $1,000 per monthly, based upon the underwriting rule at 1% of the balance.
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- How it works
The maximum DTI for an FHA loan is typically 43% of your monthly household income. Calculate your DTI by taking your monthly debt payments and dividing that number by your gross income (before taxes).
This is an example of how an FHA borrower could be affected by the new and old guidelines.
Who can take advantage of the new FHA loan eligibility rules?
However, the market is difficult right now for anyone looking to buy a home. Bidding wars have resulted in home prices rising due to a lack of housing inventory and extremely low mortgage rates. Although the FHA loan process could be made easier for first-time buyers, it is unlikely to make a significant difference.
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Matthew Garland, division manager at the Garland Mortgage Group, and cohost of Rants & Gems realty podcast says that “it’ll be interesting” to see how the market changes over the next three to six month. “I believe this will continue driving a seller’s marketplace and continue to increase home prices nationwide,” says Matthew Garland, division manager with the Garland Mortgage Group and co-host of Rants & Gems real estate podcast. This means that you will still face the challenge to find a home affordable and get your offer accepted.
- Potential Refinancers
It’s worth exploring how much you can save now if your student loan debt is what prevented you from refinancing into an FHA loan. Garland states that this program is ideal for people who are looking to refinance. We can help them qualify if they are in the income-based repayment plan. Then they will be able to refi at a lower rate.
When refinancing, you will be responsible for closing costs ranging from 3% to 66% of your mortgage balance. FHA loans come with an additional upfront mortgage insurance premium of 1.755% on top of ongoing mortgage insurance payments.
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Before deciding whether an FHA refinance is right for you, compare the refinance options available to you. It is important to ensure that the savings you make from refinancing are not outweighed by the cost of staying in your home.