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FHA Will Change How Student Loan Debt Affects Eligibility

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Housing Policy + Finance

FHA Will Change How Student Loan Debt Affects Eligibility


June 28, 2021
Reviewing paperwork
Photo: Charlie's | stock.adobe.com

In order to assist more lower-income homebuyers and close the racial homeownership gap, the Federal Housing Administration (FHA) will change the way it reviews an applicant’s student loan debt. Realtor.com says student loans have greatly increased during the last 20 years while homeownership rates among younger adults have dropped to historic lows. Both Fannie Mae and Freddie Mac have eased their criteria in recent years, and now the FHA will follow suit. Before the changes, the FHA assumed all borrowers paid 1% of their student loans each month, but the generalization likely blocked many worthy borrowers by inflating their debt-to-income ratio.

“This new policy will make a big difference for individuals throughout our nation and is another step in our mandate to promote equity and opportunity for homeownership,” said HUD Secretary Marcia Fudge in a statement. Ms. Fudge is expected to discuss the changes at a Black homeownership event in Cleveland on Friday.

Before Thursday’s changes, the FHA program assumed that many borrowers were making monthly payments equal to 1% of their unpaid student-loan balances. Industry groups and consumer advocates say that method tended to inflate a borrower’s debt-to-income ratio and disqualify otherwise creditworthy borrowers from FHA loans.

Under the new policy, FHA will abandon the 1% assumption in favor of a calculation that better reflects what borrowers actually pay monthly. The changes are a victory for such groups as the Mortgage Bankers Association, which say the existing policy has imposed undue roadblocks on home buyers.

Alfreda Williams, a senior homeownership adviser at HomeFree-USA, a mortgage counselor in Riverdale, Md., said many people with solid incomes were disqualified from FHA loans because of the way their student loans are currently calculated.

“It is truly an issue now for a lot of people and especially people of color,” Ms. Williams said. Minorities, she said, disproportionately have past credit issues that can make it more difficult for them to qualify for conventional financing.

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