Heads Up On Student Loan Changes
Heads Up On Student Loans
Heads up on student loan changes and how they are now calculated for homebuyers beginning on June 30, 2016.
As you may know, a Federal Housing Administration (FHA) mortgage is an attractive option for first-time homebuyers because it often enables a lower down payment and other suitable criteria for first-time homebuyers.
Beginning June 30, there was a change in how FHA calculates student loans with respect to mortgage eligibility. Generally, when approving a mortgage, lenders will analyze a potential homebuyer’s monthly debts vis-a vis his/her income to evaluate whether the homebuyer will struggle to pay his/her mortgage. This is referred to as debt-to-income ratio. (For more on how student loans may affect mortgage eligibility, click here.)
Before September 2015, borrowers who had their student loan payments deferred for at least 12 months could exclude their student loan debt from their debt-to-income ratio when applying for a mortgage. However, FHA changed that guideline and required lenders to use 2% of the outstanding balance or the actual monthly payment.
Beginning on June 30, 2016, however, FHA made an additional change to calculate homebuyers’ monthly debt. Now, the greater of either the 1% of the outstanding student loan balance, or the monthly payment reported on the borrower’s credit report, or the actual documented payment provided the payment will fully amortize the loan over its term, will be factored. Let’s take an example:
A homebuyer owes $30,000 in student loans with a repayment plan of $50 per month. The payment based on 1% of the balance of $30,000 is $300 per month. With the new guidelines, lenders are required to use the greater of the two, which would be $300 per month. And, factoring in the third newly required FHA calculation of the actual documented payment over the full amortization of the loan, the greatest of the three would need to be calculated, which is $345 per month.
So, heads up, as there are significant changes! Yet, although these new guidelines may provide some challenges, the good news is that there are still many viable and attractive mortgage options for first-time homebuyers. As an agent with Long & Foster Real Estate, I am fortunate to have in-house mortgage experts as my partners in working with homebuyers through Prosperity Mortgage, a wholly owned subsidiary of Long & Foster Companies.
Call me today and my Prosperity Mortgage partners and I will work closely with you to help you and any others find the home (and mortgage!) of your dreams.