FHA Updates Policy on Student Loan Calculation
Written By: Joel Palmer, Op-Ed Writer
The Federal Housing Administration (FHA) has updated policies on how mortgage lenders calculate student loan debt for potential borrowers.
FHA said in its announcement that the policy update is designed to “provide more access to affordable single family FHA-insured mortgage financing for creditworthy individuals with student loan debt, which has a disproportionate impact on people of color.”
“Homeownership is the cornerstone of the American Dream and the best way to build generational wealth,” said Housing and Urban Development (HUD) Secretary Marcia L. Fudge. “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. This new policy will make a big difference for individuals throughout our nation and is another step in our mandate to promote equity and opportunity for homeownership.”
HUD statistics show more than 80 percent of FHA-insured mortgages go to first-time homebuyers. Of those, more than 45 percent have student loan debt, with much of that debt held by people of color.
The policy updates published June 17 for FHA Single Family Title II forward mortgages 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. The new policy bases the monthly payment on the actual student loan payment, which is often lower, and helps home buyers who, with student debt, meet minimum eligibility requirements for an FHA-insured mortgage.
Lenders may implement the changes immediately but must implement the changes for FHA Case Numbers assigned on or after August 16, 2021.
In a letter to mortgage lenders, FHA spelled out the policy changes.
For required documentation, the mortgagee may exclude the payment from the borrower’s monthly debt calculation where written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.
In the section on calculation of the borrower’s monthly student loan obligation, mortgagees must use:
The payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero; or
0.5 percent of the outstanding loan balance, when the monthly payment reported on the borrower’s credit report is zero. The previous requirement was 1 percent.
These changes will be reflected in the following HUD policy references: HUD Handbook 4000.1sections II.A.4.b.iv(H) Student Loans (TOTAL) and II.A.5.a.iv(G) Student Loans (Manual), and HECM Financial Assessment and Property Charge Guide section 3.83 Student Loans.
HUD will accept feedback for 30 calendar days from the date of issuance. You can send feedback to the Federal Housing Administration (FHA) Resource Center at answers@hud.gov. HUD said it will consider the feedback in determining the need for future updates.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
