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Student Debt Rule Change

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Posted On: 06/29/2016

Question:

Some friends were turned down for an FHA mortgage because their student loan payments were too high. We worry that we might be in the same position, but if we spend more money to reduce our student debt we’ll have less for a down payment. What can we do?

Answer:

There’s a lot of student debt out there but a new FHA rule change could help you and your friends.

According to Federal Reserve Bank of New York figures released in May, student debt now stands at $1.26 trillion. That’s more than Americans owe on auto loans ($1. 07 trillion in the first quarter) or credit cards ($712 billion).

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Americans added $29 billion more in student loan debt in the first quarter alone.

As student debt has grown so have monthly payments. Those steeper monthly payments can push mortgage applicants above allowable debt-to-income (DTI) ratios, forcing the lender to decline the mortgage loan.

In the case of student loans it’s possible to defer payments. If someone applies for a mortgage during a period when payments are not being made or before payments begin, that would certainly appear to help their DTI – even though the debt is still outstanding and must be repaid at some point.

Back in September, HUD created a new student loan standard for FHA mortgages. Under the new rule, HUD said FHA lenders must include the borrower’s monthly student debt payment when computing the debt-to-income ratio. If a payment is not being made, then the lender must use a figure equal to 2 percent of the outstanding student debt.

Let’s say the borrower has the average amount of student debt – $28,950, according to The Institute for College Access and Success. Two percent of that amount is $579. Combine $579 with other recurring monthly debts, such as auto loans, credit card payments and housing costs, and enormous numbers of borrowers will fail the DTI test.

Why HUD elected the 2 percent standard is unclear. At 4 percent interest, the monthly cost for a $29,850 loan over 25 years would be $157.56, far less than $579.

This year, however, HUD has revised its policy. The new rule is that the lender only has to count 1 percent of the outstanding balance toward monthly payments when a student loan is in deferment.

The new rule will have a big impact for that typical borrower with $29,850 in student debt who is not currently making student loan payments. Instead of $579 being added to the monthly debt total, the new figure will be $298.50. For many borrowers that’s the difference between a mortgage approval and renting.

The new HUD policy will instantly help large numbers of FHA mortgage applicants qualify for financing. For details and additional information, please speak with mortgage loan officers.

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Peter G. Miller is author of “The Common-Sense Mortgage.” Email real estate questions to peter@ctwfeatures.com

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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