Ask any homeowner to share the details about the home buying process, and chances are…
The short answer to the question do student loans affect buying a house is YES. The fantastic news is that recent changes in FHA loan program guidelines might affect your situation in a positive way! This is especially true if you’ve been turned down for a mortgage in the past because of your student loan debt.
Student loan debt remains a difficult situation to manage in the United States. Recent reports place the average outstanding amount at just over $30,000 per person, which is not an insignificant amount of money to owe. The higher ends of the spectrum can easily go into six-figure numbers, making things even more difficult for those wondering about does student loan debt affect buying a house.
The main change to the FHA loan program lies in the way your debt-to-income ratio is calculated concerning student loan payments. Up until now, lenders had to qualify mortgage applicants using a monthly payment of at least 1% towards their student loan balance, regardless of if that was their actual monthly payment and ignoring whether or not the loan was deferred.
Let’s back up for a second before we unpack all the details on do student loans affect buying a house. Let’s explore what a debt-to-income ratio is and present an overview of an FHA mortgage.
What is a debt-to-income ratio?
Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. Mortgage lenders measure your ability to manage the monthly payments to repay the money you plan to borrow. Here’s an example of the calculation from consumerfinance.gov:
To calculate your debt-to-income ratio, you add up all your monthly debt payments and divide them by your gross monthly income. Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out. For example, if you pay $1500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.)
What is an FHA Mortgage?
One of the main differences of the FHA Mortgage is that the insurance for the mortgage comes from the Federal Housing Administration directly (that’s what FHA stands for). Third parties still issue the loans, but they must be explicitly approved as FHA lenders. In addition, FHA mortgages typically come with smaller down payment requirements (as low as 3.5% of the purchase price) and can be approved for people with lower credit scores compared to traditional mortgages.
FHA’s New Student Loan Calculations
According to the new guidelines, lenders must use your student loan payment amount that is reported on your credit report or the actual student loan document payment when the payment amount is zero. If the monthly payment on your credit report is zero, the lender must calculate a payment for you by multiplying the balance by 0.5%. This is a significant improvement from the previous FHA guidelines which required the lender to use 1% of the balance.
How It Works Right Now
Sally owes $30,000 in student loan debt to ABC Student Loan company. Sally’s credit report shows that her monthly payment is $0 on this loan. The FHA lender will multiply $30,000 by 0.5% and calculate Sally’s monthly debt as $150 for that student loan.
Deferment and New Guidelines
Deferred student loans are still included in debt calculations when applying for an FHA mortgage. Veteran borrowers can take advantage of programs that relieve them of this point, excluding their deferred student loans from debt calculations. But everyone else should adapt their search accordingly and expect the conditions to change depending on how much they have in deferred student loans.
Get Started Today!
The situation is great for potential borrowers, including those whose credit might have been affected by student loans in the past. If you’re not sure whether you qualify for the attractive new conditions, get in touch with MBA to get started assessing your situation today! The sooner you act, the more benefits you’ll be able to reap in the long run, as long as you’ve done the appropriate preparations in advance. Make sure to understand the full set of implications of your student debts, though, especially any deferred loans.
The rest comes down to researching the market correctly and playing your cards right. When you are pre-approved before starting your search, it makes things that much easier since you know exactly how much house you can afford. Get in touch with a mortgage professional from MBA Mortgage today to learn more about how this change may affect you.