On September 14th, 2015 the Federal Housing Authority (FHA) changed its rules on the calculation of student loan debt as it refers to the Debt-To-Income (DTI) calculation when qualifying a buyer for a mortgage (see table below). It used to be that if a student loan was in deferment for more than 1 year, the student loan payment would not be counted against the income of the buyer. This would allow the buyer to borrower more money since for every $50 spent on a student loan payment equals about $10,000 of purchase power.
Is this a good thing?
The argument: When a student finishes school, the monthly payment can be negotiated to a lower amount based on the student’s previous 2 year’s tax returns, called Income Base Reduction (IBR). The new FHA ruling however, qualifies the student using his/her current income, not the future 2 years’ tax returns that will be used when adjusting the monthly debt. The other issue is that the student may be earning more money upon graduation but is being penalized now for trying to earn more money in the future. This ruling is really going to put a hold on the youth who are wanting to buy a house while working and going to school for a better education and more money.
The counter argument: There is no way to know how much money the buyer will make upon graduation, so it’s not possible to know how much reduction there will be on the student loan payment in the future.. Student loans cannot be defaulted on nor can they be included in bankruptcy. They MUST be paid. Therefore, it’s inevitable that these payments will become a monthly debt to the future homeowner.
The issue for me is how and when it is being calculated. What is the answer then? As a lender, one must consider risk at all times. Should a lender risk lending money to a buyer with hopes that the buyer earns more income after graduation?
Like I said, it makes my job harder to qualify someone who makes $2000 a month in income, is allowed to use $800 to qualify for a loan but has $600 a month in student loans. My first question is, “Why are you only making $24,000 a year after paying $60,000 in tuition?” Most of the answers I get: “I can’t find a job in my major”, “There are no jobs out there”, “I don’t know”. “I haven’t graduated yet”.
Risk plays an important role in lending money and based on statistics gathered by the government, this rule, as painful and unfair as it may seem, may be a gift to a buyer trying to qualify for a mortgage loan, whose student loan debts were deferred because of their probable inability to pay the mortgage and the student loan.
Growing concern: What I know is that there are a lot of young people who are making less money and spending money they don’t have. Over just the last 6 months, I’ve encountered 12 applicants who’s bank statement were depleted from buying fast food, sometimes as much as 6 times a day at the same place. Others lost over $300 a month, several months in a row, in non-sufficient-funds banking fees or spending money using ATM machines that charge fees. A few of them spent hundreds of dollars on phone app services or buying $1000 cell phones instead of saving the money towards a home purchase. The average balance of those 12 buyers was less than $1000 and all of them required some form of down payment assistance in order to buy a home. The average credit score was just over 620 and collection accounts plagued the credit report from utility companies, cell phone companies and unpaid rent. More than half had a college degree and the average income for all of them was less than $30,000 a year while racking up over $40,000 of student loan debt.
So much money is spent on college tuition and I believe that many of these institutions are not offering classes to these young folks on how to manage their money, save their money or how to gain the confidence they need to find better paying jobs. Until they do find a better paying job or pay off their student loans, they won’t be buying a house if their student loan debt disqualifies their ability to obtain a mortgage.
The solution: We need to get out and educate young people on how to apply for college with regard to giving them proper guidance on choosing a degree that offers a profession worthy of paying back the student loans. If we tackle this issue now, then future generations will be able to buy a home without the concern of student loans keeping them from their dream of home ownership.
Starting on September 15, 2015, a bunch of different rules came out on how to handle student loan deferments for FHA, VA, USDA, and Fannie and Freddie:
If Payment Payment begin If Payment is If Payment
already established in 12 months to be deferred has been reduced
Greater of Greater of Greater of Greater of
1% of balance 1% of the balance 1% of the balance 1% of the balance
or payment or payment or payment or payment
on credit report on credit report on credit report on credit report
Count monthly Count anticipated Don’t count if Use reduced payment
Payment monthly payment payment deferred after receiving proof
13 months or more of such
Use either of: Use either of: Use either of: Use either of:
1% outstanding 1% outstanding 1% outstanding 1% outstanding
Balance; Balance; Balance; Balance;
Credit report Credit report Credit report Credit report
Payment; Use Payment; Use Payment; Use Payment; Use
Table below Table below Table below Table below
Count monthly Count monthly Use 1% of outstanding Prove reduction.
payment payment balance If > 10 months
Remaining, must count
Fixed rate: entire Greater of 1% Greater of 1% Greater of 1%
payment used. of balance or of balance or of balance or
Variable rate: 1% fixed payment on fixed payment on fixed payment on
of loan balance. credit report credit report credit report.
Exceptions: Lower payments shown on credit report may be used if proven that the loan is a fixed rate.
Fannie Mae Repayment Period Table
Balance Repayment period
$1 - $7499 10 years
$7500 - $9999 12 years
$10,000 - $19,999 15 years
$20,000 - $39,999 20 years
$40,000 - $59,999 25 years
$60,000 or more 30 years
Example: Balance $17,500. Repayment period 15 years. Interest rate 4%. Monthly payment: $132