FHA Reduces Barriers to Homeownership for Individuals with Student Loan Debt

Last week, the Federal Housing Administration (FHA) announced immediate changes on how student loans are calculated, which will open the door to families that were previously shut out of homeownership due to high student debt.

The policy updates remove the current requirement that lenders calculate a borrower’s student loan monthly payment at one percent of the outstanding student loan balance for student loans that are not fully amortizing or are not in repayment. The new policy uses the actual student loan payment, which is often lower and helps home buyers meet minimum eligibility requirements. The policy states:

For outstanding Student Loans, regardless of payment status, the Mortgagee must use:

• the payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero; or

• 0.5 percent of the outstanding loan balance when the monthly payment reported on the Borrower’s credit report is zero.

These changes are very positive and will substantially reduce barriers to achieving the American dream of owning a home.

How do student loans affect buying a house?

Historically, student loan debt has had a negative impact on aspiring, creditworthy homeowners. The rising cost of an American education further punishes people with student loan debt by:

(1) making it difficult to save for a down payment;

(2) increasing your debt-to-income ratio, affecting your ability to qualify for a mortgage;

(3) significantly lowering your credit score if you miss a payment; and

(4) risking foreclosure once you’re a homeowner because making mortgage payments can be challenging with student loan payments, as well.

Unfortunately, for all the benefits of getting an education, there are significant drawbacks for many would-be homeowners, particularly for people of color. The updated policy helps to streamline and simplify originations for borrowers with student loan debt obligations.

Lenders may implement the changes immediately but must implement the changes for FHA Case Numbers assigned on or after August 16, 2021. Many have given up the dream of owning their own home and won’t try again. Help turn their American dreams into reality! Spread the word.