New FHA Rules To Make It More Difficult For First Time Buyers

The FHA is implementing a rule that will be twice as stringent as either Fannie Mae or Freddie Mac. Currently, Fannie and Freddie will assume that 1% of a borrower’s outstanding student loan debt must be paid back each month. Thus, if a borrower has $10,000 in student loans outstanding, both Fannie and Freddie will assume that the monthly payment is $100. The more payments a borrower is obligated to make per month, the more it effects the debt to income ratio and the less the borrower can afford for a home mortgage.

New rules that the FHA is implementing are going to make it even more difficult for first time home buyers. The FHA is going to assume that a full 2% a borrower’s outstanding student loan debt must be paid back each month, doubling the figure that Fannie and Freddie use.

The Seattle Times reports:

The net effect of the changes, say mortgage lenders and analysts, will be to make FHA loans, which traditionally have been the go-to financing source for young, first-time and moderate-income purchasers, less attractive.

Here’s a quick overview of who will take the brunt of the new restrictions:

At the end of last year, young households and others had an estimated $1.2 trillion in outstanding student loan debt with an average balance close to $27,000, according to research by the Federal Reserve Bank of New York. Delinquency rates on those loans are significant: 17 percent of borrowers are delinquent or in default and another 20 percent are current on payments but have experienced delinquencies in the past.

Student loan-payment obligations get rolled into the crucial debt-to-income (DTI) ratios lenders use to judge whether a borrower has the ability to repay a mortgage. Too high a ratio of total household monthly debt payments compared with income — typically somewhere in the 43 percent to 45 percent range — means the applicant is carrying too much debt and is more likely to default on the mortgage. Such applicants typically have a tougher time getting approved than people with lower DTIs.

Until Sept. 14, when the revised policy took effect, FHA treated applicants with student-loan debt generously on DTI calculations: If an applicant had been granted a temporary deferment from making monthly payments by his or her student-loan servicer for at least 12 months, the agency instructed loan officers to ignore the debt for DTI qualifying purposes.

Why the increased restrictions, especially given FHA’s historic role as the homebuying helper for the underserved? Brian Sullivan, an FHA spokesman, told me this: “Deferred student debt is debt all the same and really must be counted when determining a borrower’s ability to sustain both student-debt payments and a mortgage over the long haul.” The agency’s primary goal, he added, is to put first-time homebuyers “on a path of sustainable homeownership rather than being placed into a financial situation they can no longer afford once their student-debt deferment expires.”

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