Student Loans: America's Big Burden
In 2021, the vast majority of those with an undergraduate degree are burdened with student debt– more than two-thirds, compared with the early '90s when fewer than half of graduates left school with debt. The amount has increased exponentially as well, the average balance more than tripling from $9,000 to $30,000; the average monthly payment is $400. Overall, more Americans carry student loan debt, and in greater amounts, than credit card or auto loan debt.
As time goes on, the number of college graduates with loan debt rises, and the ability of those graduates to purchase a home falls. A study from the Federal Reserve shows that for every 10% in student loan debt a person holds, their chance of homeownership falls 1-2%. More than 80% of people between the ages of 22 and 35 cite their student loans as the singular reason they have not bought a home. Put simply, getting approved for a mortgage with student loan debt is vanishingly unlikely.
Exactly How Do Student Loans Prevent Homeownership?
All by themselves, student loans can't keep you from getting approved for a mortgage. If your student loans are your only debt and you're looking at homes in a modest price bracket, you'll likely have good luck. However, the amount of your student loans compared to your income is a key factor for most lenders when deciding whether to approve a borrower for a mortgage; if you're beyond the threshold of a safe debt-to-income ratio, you may encounter difficulty getting a mortgage with student loan debt.
At least, that was the case until this June, when the Federal Housing Administration (FHA) updated its requirements on how lenders consider student loan debt as part of that debt-to-income equation.
According to the FHA, nearly half of first-time homeowners have student loan debt, with the percentage among people of color tending even higher. These new rules are intended to increase access to FHA-backed mortgages for underserved communities, who often bear more significant student debt than their white and middle-class counterparts.
An In-Depth Look At The New Regulations
The main thrust of the change removes the current requirement that FHA-backed loans assume that a borrower's monthly student loan payment is equivalent to 1% of their outstanding student loan debt. For example, a borrower with an outstanding balance of $50,000 may have a monthly payment of less than $200 under approved income-driven repayment plans. But banks would, under the old regulation, be required to assume that the borrower's monthly payment was $500.
When taken in conjunction with their other debt and credit profile, this could prevent the borrower from getting approved for a home loan. But under the new policy, the borrower's actual monthly payment amount will go into banks' calculations, even if that payment is below the typical 1%.
This could mean big changes in who can get a mortgage with student loan debt still on their record. With the new regulation in place, borrowers who are otherwise creditworthy won't be held back from being approved for a home loan simply due to their student debt. This especially serves communities of color, who have historically been shut out of homeownership by redlining and other forms of discrimination.
In the FHA's announcement on June 18th, Housing and Urban Development Secretary Marcia L. Fudge said, "Homeownership is the cornerstone of the American Dream and the best way to build generational wealth. 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."
How Clearview Realty Can Help
Clearview Realty has more than 25 years of experience in the mortgage industry – just the expertise you need for a successful outcome. Our team of mortgage consultants works to simplify the process for you while educating you on this complex process. Our priority is customer service. It is our goal to make this process as easy and convenient as possible while getting you the best deal on your loan. We work with borrowers of every type, from those who want to buy their first home, refinance the house they are in now or have credit challenges. Whether it's your first home or you're an experienced home buyer, we're here to ensure everything goes as smoothly as possible.