FHA eases path to homeownership for borrowers with student debt

The Federal Housing Administration has lowered a relatively high bar it had previously set for purchase-mortgage borrowers with income-based repayment plans for student debt.

On Thursday, the FHA announced that going forward it would be calculating monthly obligations for those with income-adjusted payments in deferment based on 0.5% of the outstanding student loan balance. Lenders can opt into the change immediately and it becomes mandatory for mortgages assigned case numbers by the FHA starting Aug. 16. Previously, the FHA had used 1% of the outstanding student loan amount in debt-to-income calculations to determine whether consumers that had them could qualify for a mortgage.

The change comes after roughly half of the 40 million people with student loans went into forbearance due to the pandemic. It’s also in line with the Biden administration’s broader review of income-based student loan programs, which is aimed at easing their terms.

Emmanuel Lewis, a loan applicant in Texas who has had difficulty getting a home loan due to his student debt and financial troubles linked to an alleged fraud, said he was cautiously optimistic about the FHA’s change.

“Student loans gave me a higher interest rate when I tried to refinance and recently, when I was trying to buy a home, they were also held against me. The more expensive costs for my home because of student loans also put me at risk of losing my home to a real estate scheme,” he said in an email. “The changes in the student debt underwriting policy will allow more folks to have a home at a lower cost.”

The FHA has been cautious about making the change in the past due to the risk it could pose to the consumer’s ability to repay a home loan. However, some mortgage executives think 0.5% will be sufficient for a DTI calculation because the 1% measure general overestimated the extent of actual payments.

“You shouldn’t have to project a payment that is higher than what an actual one would be because of this, and you are increasing a low-to-moderate income family’s ability to get into a home,” said Don Calcaterra Jr., president of Michigan-based mortgage company Local Lending Group. Calcaterra also is the past chairman of the Community Home Lenders Association and a current member of the group.

The FHA standard was previously the strictest of all the government-related agencies, and it is now similar to those at Freddie Mac and the U.S. Department of Agriculture. (The Department of Veterans Affairs uses the terms of payment documented by the student loan servicer when the loan has been in deferment for less than 12 months, and Fannie accepts either a fully amortizing payment using documented loan terms or the 1% measure.)

“Those standards are more aligned now, which we are a fan of,” said Pete Mills, a senior vice president at the Mortgage Bankers Association.

The FHA’s change could help boost relatively low levels of homeownership for Black households that stem from income disparities, Marcia Fudge, secretary of the Department of Housing and Urban Development, and Senate Banking Committee Chair Sherrod Brown, D-Ohio, said in a press release Friday.

“Too many generations of Black families are locked out of the opportunity to get an affordable mortgage, own their own home, and build wealth to pass on to their children and grandchildren. I commend HUD and Secretary Fudge for taking this first step to address inequities in our housing system,” said Brown.

Alex Wong/Bloomberg

“As our country comes together to remember Juneteenth and acknowledge National Homeownership Month, we are reminded of a basic truth: that, too often in our history, the march toward freedom has been a long, halting, and uneven journey,” Fudge said. “Homeownership is the cornerstone of the American Dream and the best way to build generational wealth. I am proud that FHA is taking action to make it easier for borrowers with student loan debt to qualify.”

Also in conjunction with Juneteenth’s recent establishment as an official national holiday, 100 organizations coming together under the umbrella of the Black Homeownership Collaborative on Friday outlined a seven areas key to significantly reducing disparities by 2030. In addition to credit and lending, they include counseling, down payment assistance, housing production, sustainability, civil and consumer rights, marketing and outreach, and sustainability.