New FHA Student Loan Guidelines Makes It Easer To Buy A Home

Student Loans
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For many people, high student loan balances are one of the main barriers to achieving homeownership. Student loan debt can cause many first time home buyers to not qualify for a home loan, or depending on the loan balance, they may decide to focus on paying off this debt first. If student loan debt has delayed your dreams of owning a home, a recent change in FHA guidelines could make it easier to qualify for an FHA home loan.

The Original Guideline

In the past, the old guideline stated that lenders were required to use 1% of your total loan balance when calculating your debt-to-income (DTI) ratio. In addition, income driven repayment plans could not be used to calculate DTI ratios. This was a huge problem for student loan borrowers, and here’s why:

The average student loan debt for those who pursued a bachelors degree is around $30,000, and the average student loan debt for those who pursued a masters degree is around $70,000. Neither of these averages are remotely close to student debt for those who attend medical or law school.

So let’s just say you have $50,000 worth of student loans, and you decide to submit an application to get pre-qualified for a mortgage. The lender will calculate your debt-to-income ratio to determine if you pre-qualify. When looking at your student loan balance, they will calculate 1% of $50,000 which is equals $500. $500 will be considered your monthly student loan payment, and they will factor this into your monthly DTI. But what if you’re on an income driven repayment plan that only requires you to pay $150 per month? This is where the problem is. In reality, most borrowers aren’t paying any where near 1% of the outstanding loan balance each month which is causing an inaccurate picture of their monthly DTI ratio.

The New Guideline

The Federal Housing Administration (FHA) announced, in June 2021, that they’ve updated their guidelines on how they require lenders to calculate student loan debt for FHA loans. The goal of this change is to help eliminate barriers to homeownership. These new guidelines will allow a lot of first time home buyers to have a better chance in pre-qualifying for a mortgage.

The new guideline states that no matter if the student loans are currently being paid, in deferment or in forbearance, mortgage lenders are required to use a borrower’s ACTUAL monthly student loan payment, even if it is below the traditional amount of 1% of the total balance.

If a student loan borrower’s calculated payment is $0 (which is possible under an income-driven repayment plan, or in forbearance), mortgage lenders will use 0.5% of the outstanding student loan balance as an assumed payment, rather than 1%.

So back to the example I used earlier, if you have $50,000 in outstanding student loan debt and your current monthly payment is $0, the lender would calculate 0.5% of the $50,000 towards your DTI ratio which is about $250.

Conclusion

As a result of this new magical change, many student loan borrowers will be able to qualify for a home that they would not have qualified for weeks ago. This is huge, so make sure everyone you know that has student loan debt is aware of these new guidelines. Many lenders are already using the new guidelines for underwriting/qualifying purposes.

The Journey Home: What Happens AFTER Your Offer Is Accepted

The home buying process can be a long, drawn out process that could also involve a roller coaster of emotions. It has become the new norm for sellers to receive multiple offers on their homes, and this is causing heightened competition amongst home buyers. If your offer is accepted during this current housing market, consider this to be a huge accomplishment. Here’s what happens next.

Beautiful brick home
Photo by Dillon Kydd on Unsplash

Under Contract

Day 1: Binding Agreement date & 1st day of Due Diligence

  • Your earnest money (typically 1% of the purchase price) will be due within 3 days from the binding agreement date. This money is wired to the settlement/closing attorney.
  • Be sure to let your lender know that you are under contract and submit all required documentation on time.

Due Diligence Period

Day 1-10: Inspection and Discovery

  • During the due diligence period, schedule an inspection with a reputable home inspector who will do a thorough investigation of the home. Once this is complete, the inspector will provide a list of their findings. You can accept the home and the identified issues as-is, or you can request the seller to address some, or all, of the findings. It is important to be mindful and reasonable on smaller items, while being very cautious and vigilant of potentially significant issues.
  • By the end of this period, any items revealed that need to be addressed must be agreed upon by the seller to repair. If no agreement is reached, you may terminate the contract.

Appraisal Contingency

Day 14: Your lender will arrange for a third party appraiser to provide an independent estimate of the value of the house you are buying. The appraisal lets all parties involved know that the price is fair. The loan file then moves on to the mortgage underwriter.

  • The appraised value should be equal to or greater than the purchase price. If the value is less than the purchase price, you have 3 options:
    1. Ask the seller to amend the purchase price
    2. Terminate the agreement
    3. The buyer can pay the difference between the sales price and the appraised value

Warranties & Insurance

The mortgage lender will require you, as the buyer, to obtain a home owner’s insurance policy on the property before closing. Shop around and choose a homeowner’s insurance provider and policy that works best for your home. Since homeowner’s insurance polices can vary in pricing and coverage. I recommend getting quotes from at least three insurance providers.

Financing Contingency Period

Day 21: The buyer’s loan should be approved by lender with or without conditions. If approved you will receive your final commitment letter that includes the final loan terms & percentage rates.

Closing Disclosure

Day 27 (or 3 days prior to the closing date): The buyer must acknowledge and sign for all fees affiliated with the purchase. Be sure to review and complete these documents as soon as possible to prevent any delays in closing.

Closing

Day 30 (based on loan type): Complete final walk through and send wire all cash to close to settlement/closing attorney. Keys will be received at closing.

  • It is best for the homebuyer to do a Final Walkthrough right before the closing. The purpose of a Final Walkthrough is to verify that all repairs have been completed. It’s also wise to check that all of the seller’s personal belongings are removed. This is your opportunity to make sure the home is ready to move in.
  • On the day of closing, be sure to bring an approved photo ID and certified funds. If you’re required to bring money, it will be on your closing statement. If you’re obtaining a mortgage loan to purchase the home, you will have to sign a lot of paperwork. So be prepared! Once the documentation is approved, and your lender has funded the transaction, the transaction is complete.

Home Buyer Do’s and Dont’s

So you’ve made the decision to apply for a mortgage? Or maybe you’ve been pre-approved for a home loan. If either of these scenarios apply to you, then let me be one of many to say congratulations! Once you’ve embarked on the mortgage application or pre-approval process, there are certain things you should and should not do. The factors listed below may either help or hinder your chances of home loan approval. Be sure to consult with your loan officer before making any financial decisions.

Don’t

  • Quit your job, get terminated, or change jobs
  • Apply for credit cards or loans of any kind
  • Do no co-sign for any debt
  • Close any trade lines (credit accounts)

Do

  • Make sure you make all payments for any revolving credit on time or early
  • Call and ask your lender before making and financial decisions, because your debt to income ratio can be affected
  • Shop for a mortgage with up to 3 lenders within 2 weeks or less
Home Buyer Do's and Dont's