For many mortgage borrowers, the biggest lending problem they face doesn’t have anything to do with income or appraisals. Instead, the big issue is too much student debt. Now – in a move than many will welcome – HUD has eased the student loan standard for FHA borrowers.
Unlike mortgages, you don’t need an income or assets to qualify for student financing. Instead, such loans are made with the presumption that as a result of enhanced skills incomes will rise and therefore borrowers will have the ability to repay their debts. It’s a neat theory, but in recent years several problems have arisen which complicate both student loans and mortgage borrowing.
First, the amount of student debt is enormous. In 2008, student debt amounted to $610 billion in the third quarter, a total which doubled to $1.23 trillion by the end of 2015.
Second, incomes are not rising. According to the Census Bureau, the median household income in 2014 was 7.2 percent lower than in 1999.
In terms of mortgage financing, the problem is that big debts create big monthly payments. As monthly debt payments rise, they bump into the debt-to-income limits (DTI) which lenders use to qualify borrowers.
In the case of FHA mortgages, most borrowers are allowed to have a 43 percent DTI; that is, up to 43 percent of their gross monthly income can be use for housing costs and recurring debts such as student loans, car payments and credit card obligations. If student loan payments go up, there is less room under the DTI cap for other forms of debt – and if student loan payments go too high, the borrower will simply not qualify for financing.
Student Loans & FHA Mortgages
To make matters worse, last September HUD announced a new student loan benchmark: In cases where borrowers had deferred student debt or were delinquent, FHA lenders would be required to up monthly debt calculations by an amount equal to 2 percent of the outstanding debt. In other words, if you owed $25,000 but had deferred payment – a perfectly acceptable notion in the world of student loans – the lender would be required to add $500 when calculating your DTI ($25,000 x 2% = $500).
What is especially strange about the September standard is that it lacks any sort of financial basis. For instance, if you borrowed $25,000 at 4 percent, your monthly costs for principal and interest over 20 years would be $151.50 – not even a third of what HUD required.
The result of the September HUD standard was easy to predict, lots of potential borrowers could no longer qualify for FHA financing.
HUD has now instituted a new rule and the result is that if it’s been difficult for you to qualify for an FHA mortgage since September, you might want to re-open conversations with lenders.
The new HUD benchmark works like this – if you are not now making student loan payments, lenders will have to use an amount equal to 1 percent of the outstanding debt when calculating your DTI. Going from 2 percent to 1 percent – or from $500 to $250 in our example – means that large numbers of people who have not recently qualified might now be within the guidelines.
If you are making monthly student loan payments then, as always, that’s the number which lenders will use when computing the DTI.
For more information, speak with lenders. They’ll be happy to share the latest student loan standards with you.