WASHINGTON – The Federal Housing Administration eases the way it assesses student loan debt when balancing eligibility for home purchase assistance as the Biden government pushes to help lower-income borrowers and narrow a racial homeownership gap.
The changes, unveiled in a letter to lenders late Thursday, are designed to allow more borrowers to qualify for loans backed by the FHA, a division of the Department of Housing and Urban Development that provides primary and secondary mortgage insurance Lowest insurance offers -home buyers.
Potential homebuyers who qualify for FHA help tend to have lower credit scores than those on other government-supported loans – such as those guaranteed by Fannie Mae and Freddie Mac – and according to data collected by federal regulators, they are disproportionately black and Hispanic. The surge in student debt over the past two decades coincided with historically low home ownership rates among younger households. Some researchers say the phenomena are related.
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Easing the consideration of student debt will bring the FHA more in line with other government-sponsored mortgage programs like Fannie and Freddie, which have also eased their criteria in recent years. The Biden government is proposing more down payment assistance for black home ownership and is taking a number of other measures to fulfill a promise to combat racial justice in housing.
“This new policy will make a huge difference for individuals across our country and is another step in our mission to promote equity and opportunities for home ownership,” said HUD Secretary Marcia Fudge in a statement. Ms. Fudge is expected to speak about the changes at a black homeowners event in Cleveland on Friday.
Before Thursday’s changes, the FHA program assumed that many borrowers would make monthly payments equal to 1% of their unpaid student loan. Industry groups and consumer advocates say this method tended to inflate a borrower’s debt to income ratio and exclude otherwise creditworthy borrowers from FHA loans.
Under the new policy, the FHA will ditch the 1% assumption in favor of a calculation that better reflects what borrowers are actually paying monthly. The changes are a victory for groups like the Mortgage Bankers Association, who say existing policies have placed undue barriers on home buyers.
Alfreda Williams, a senior homeowner advisor at HomeFree-USA, a mortgage advisor in Riverdale, Md., Said that many people with solid incomes have been banned from FHA loans because their student loans are currently being calculated.
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“It’s really a problem now for a lot of people, and people of color in particular,” Ms. Williams said. Minorities had a disproportionately high number of credit problems in the past, which could make it difficult for them to qualify for conventional financing.
Deitric Selvage, who manages research grants and contracts for a consulting firm and searches for an apartment in suburban Maryland, is hurt by calculating his student debt. With more than $ 200,000 in student debt, Mr Selvage said he was disqualified for an FHA loan because the program assumed he was paying about $ 2,000 a month in student debt, far more than the roughly $ 370 Dollars that he actually pays.
Mr Selvage, 39, said he had found a lender who would pre-approve a conventional loan, but only through a process that would force him to forego down payment assistance for first-time home buyers. As a result, he would have to use almost all of his savings on a down payment.
“It would mean going to a house with no financial cushion,” he said.
How many FHA borrowers with high student loan balances will ultimately find it easier to buy a home under the new changes is not clear; HUD did not have an estimate in its letter of credit. In the short term, the effects are likely to be dampened by the red-hot housing market. Many homes receive multiple offers and are sold above their list prices. FHA borrowers usually find it difficult to compete in such a hectic market as they often compete with cash buyers who do not need funding who are more likely to choose sellers.
Thursday’s changes will better accommodate borrowers who, over the past decade, have used expanded student debt repayment options that tie monthly payments to their income. These options, known as “earnings-based” repayment, typically set monthly payments at 10% of “voluntary earnings” – based on a formula that includes adjusted gross earnings – and then spread the payments according to 20 or more 25 years of the size of the scale. After this time, the government will cancel the remaining balance.
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Participation in income-oriented student loan repayment plans has increased as many borrowers – especially those who have attended graduate school – accept increasingly large balances.
For some borrowers, their monthly income plan payments are too small to cover interest costs, let alone capital. HUD, an agency official said, expects its new formula to look cheaper on these lower monthly student loan payments.
The changes should give graduates “burdened with significant debt” a better opportunity to buy a home, said David Stevens, who headed the FHA during the Obama administration.
—Josh Mitchell contributed to this article.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
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