WASHINGTON, D.C. – The Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD), has updated and corrected how student debt is calculated for FHA-insured mortgages. This move will expand access to homeownership for more potential mortgage borrowers, especially for borrowers of color, first-time homebuyers, millennials, and low-income Americans.
“This change removes an unjust and unjustifiable barrier to homeownership. The policy extends the opportunity to build generational wealth to more Black and Latino and low-income families as well as families in other communities for whom opportunity has long been denied. We commend the FHA, HUD, and Secretary Fudge for this new and improved policy, and we will continue to work with them on the long road toward housing justice,” said Center for Responsible Lending (CRL) Researcher Christelle Bamona. “As President Biden’s Administration looks to advance racial equity, we encourage the Administration to act on a range of policies that remove impediments to homeownership, including targeted down payment assistance and broad-based student debt cancelation.”
The new FHA policy would “remove the current requirement that lenders calculate a borrower’s student loan monthly payment of one percent of the outstanding student loan balance for student loans that are not fully amortizing or are not in repayment.” Instead, lenders would consider in their underwriting the amount that mortgage applicants actually pay per month in student loans, which is often lower because of Income-Driven Repayment Plans. This will help more people with this lower student debt payment “meet minimum eligibility requirements for an FHA-insured mortgage.”
This more accurate measure of the monthly student debt burden would align FHA with the method already used for loans backed by Fannie Mae and Freddie Mac, the Veterans Administration, and the United States Department of Agriculture. This new FHA method is in effect for lenders on a voluntary basis immediately and on an obligatory basis starting on August 16.
A recent report from CRL shows the difficulty for renters to save for a down payment along various demographic lines and the effect of student debt as well as the impact of these hurdles. For instance, the report found that among older millennials, the net worth of homeowners is 20 times the net worth of renters.
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