Have Student Loans? It’s About to Be Easier to Get a Mortgage

Have Student Loans? It's About to Be Easier to Get a Mortgage

If you’re hoping to refinance or buy a home with student loans, then take note: It’s about to get slightly easier — at least with FHA loans.

Last week, the Department of Housing and Urban Development (HUD) announced changes to its student loan payment calculations, as well as how those impact a borrower’s mortgage application.

The reasoning behind the updates? According to HUD, it’s “to remove barriers and provide more access to affordable single-family FHA-insured mortgage financing for creditworthy individuals with student loan debt, which has a disproportionate impact on people of color.”

Let’s take a look at the exact changes that will be implemented and how they could impact your ability to buy a home with student loans.

Student loan payments and FHA mortgages

Under the changes, the FHA will use the borrower’s actual student loan payment when calculating their monthly debt obligations. If no amount is reported on the credit report, 0.5% of the outstanding loan balance is used as the payment.

Previously, lenders were required to use 1% of the loan balance for all student loans not fully amortized or in repayment (including loans in forbearance or on an income-based repayment plan).

“Homeownership is the cornerstone of the American Dream and the best way to build generational wealth,” said Marcia Fudge, HUD secretary. “I am proud that FHA is taking action to make it easier for borrowers with student loan debt to qualify for a federally insured mortgage. 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.”

Borrowers whose student loans have been forgiven, canceled, discharged, or paid in full can have their payment fully excluded from calculations.

“This announcement enhances FHA’s ability to serve one of its core demographics — first-time homebuyers,” HUD stated. “Over 80% of FHA-insured mortgages are for first-time homebuyers on average each year. FHA estimates that more than 45% of these borrowers also have student loan debt, with much of this debt impacting people of color.”

To be clear: If your actual student loan payment is less than what’s shown on your credit report, you’ll need to provide written documentation of the payment — as well as your payment status and evidence of your outstanding loan balance from your servicer — before it can be considered for your mortgage application.

Changes take effect immediately

Lenders may start using the new calculations immediately if they wish, but the changes must be implemented on all FHA loan applications by August 16, 2021.

Have questions or need guidance as to how your student loans will impact your mortgage application? Get in touch with an Embrace office in your area today.

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Aly Yale

Aly J. Yale is a freelance writer focusing on real estate, mortgage, and the housing market. Her work has been featured in Forbes, Bankrate, The Motley Fool, Business Insider, The Balance, and more. Prior to freelancing, she served as an editor and reporter for The Dallas Morning News. She graduated from Texas Christian University's Bob Schieffer College of Communication with a major in radio-TV-film and news-editorial journalism. Connect with her at AlyJYale.com or on Twitter at @AlyJwriter.