HUD aims to boost home ownership for buyers with higher student debt
WASHINGTON – Federal Housing Administration eases how it assesses student loan debt when it assesses eligibility for home buying assistance as the Biden administration strives to help borrowers low income and reduce the racial gap in homeownership.
The changes, which were outlined in a letter to lenders Thursday night, are intended to allow more borrowers to qualify for loans guaranteed by the FHA, a unit of the Department of Housing and Urban Development that provides insurance on first-time mortgages and less. -Income buyers.
Potential homebuyers of FHA-eligible homes typically have lower credit scores than people with other government-guaranteed loans, such as those guaranteed by Fannie Mae and Freddie Mac, and they are disproportionately black. and Hispanic, according to data collected by federal regulators. The surge in student debt over the past two decades has coincided with historically low homeownership rates among younger households. Some researchers say the phenomena are linked.
Relaxing consideration for student debt will bring the FHA closer to other government-backed mortgage programs, such as Fannie and Freddie, which have also relaxed their criteria in recent years. The Biden administration is offering more down payment assistance for black homeownership and is taking a number of other steps to meet its commitment to tackle racial equity in housing.
“This new policy will make a big difference to individuals across our country and is another step in our mandate to promote equity and homeownership opportunities,” HUD Secretary Marcia Fudge said in a statement. Ms Fudge is expected to discuss the changes at a black homeownership event in Cleveland on Friday.
Before Thursday’s changes, the FHA program assumed that many borrowers were making monthly payments equal to 1% of their outstanding student loan balances. Industry groups and consumer advocates say this method tended to inflate a borrower’s debt-to-income ratio and disqualify otherwise creditworthy borrowers from FHA loans.
Under the new policy, the FHA will abandon the 1% assumption in favor of a calculation that better reflects what borrowers actually pay monthly. The changes are a victory for groups such as the Mortgage Bankers Association, which says existing policy has placed undue barriers on homebuyers.
Alfreda Williams, Senior Homeownership Advisor at HomeFree-USA, a Mortgage Advisor in Riverdale, Md., Said many people with strong incomes were excluded from FHA loans because of how their student loans are currently being calculated.
“It’s really a problem now for a lot of people and especially people of color,” Ms. Williams said. Minorities, she said, disproportionately have past credit issues that can make it more difficult for them to qualify for conventional financing.
Deitric Selvage, who manages grants and research contracts for a consulting firm and seeks housing in suburban Maryland, is among those aggrieved by the way his student debt is calculated. With over $ 200,000 in student debt, Mr. Selvage said he was disqualified for an FHA loan because the program assumed he was paying around $ 2,000 per month in student debt repayment, far more than $ 370 or so that he actually pays.
Mr Selvage, 39, said he found a lender who would pre-approve him for a conventional loan, but only through a process that would require him to forgo down payment assistance for them. first-time home buyers. As a result, he would have to wipe out almost all of his savings on a down payment.
“It would mean walking into a house without any financial cushion,” he said.
How many FHA borrowers with high student loan balances will ultimately find it easier to purchase homes under the new changes is unclear; HUD did not have an estimate in its letter to the lender. The effects are also likely to be mitigated in the short term by the hot housing market. Many homes receive multiple offers and sell above their list prices. FHA borrowers generally find it difficult to compete in such a hectic market, as they often have to compete with cash buyers who do not need financing, which sellers are more likely to choose.
Thursday’s changes will better accommodate borrowers who, over the past decade, have taken advantage of expanded student debt repayment options that tie monthly payments to their income. These options, known as the “income-based” repayment, typically set the monthly payments at 10% of “discretionary income” – which is based on a formula that includes adjusted gross income – then spread the payments out over 20 or more. 25 years, depending on the size of the scale. After this period, the government cancels the remaining balance.
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Enrollment in income-driven student loan repayment plans has skyrocketed as many borrowers, especially those with higher education, accept increasingly higher balances.
For some borrowers, their monthly payments under the income-based scheme are too low to cover the interest costs, let alone the principal. HUD, an agency official said, expects its new formula to be more favorable to those lower monthly payments for student loans.
The changes should give recent graduates “overburdened with high debt” a better opportunity to buy a home, said David Stevens, who led the FHA during the Obama administration.
—Josh Mitchell contributed to this article.
Write to Andrew Ackerman at [email protected]
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