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FHA Guideline Changes For Student Loans
There has been a MAJOR change to FHA guidelines that will impact buyers significantly with student loans.
FHA seems to be getting tougher and tougher on student loans which more than likely means that they are seeing higher default rates for buyers that have student loan debt. Before September 2015, it used to be that a lender could exclude student loan debt if we could show it was in forbearance or deferment for 12 months from the date of closing. In September though, FHA changed that guideline and required lenders to use 2% of the outstanding balance or the actual monthly documented payment.
Now FHA is making it even tougher with the following guideline change to calculate the monthly debt which is going to have a huge affect on buyers.
* The GREATER of; 1% of the outstanding balance on the loan or the monthly payment reported on the borrower's credit report OR the actual documented payment provided the payment will fully amortize the loan over its term.
So, let's take an example so you can see how this will impact a buyer's purchasing power. A buyer owes $30,000 in student loan debt and is in an income based repayment plan to pay the loan back at $50. The payment based on 1% of the balance of $30,000 is $300 per month. At this point, we have to use the GREATER of the two which would be $300 per month. Now let's do the third calculation that FHA is now requiring at the actual documented payment over the full amortization of the loan over its term. Based on the payment calculated by the credit bureau it is $345 per month. As you can see the buyer's monthly debt just increased by $250 monthly!
The change takes affect with case numbers pulled after June 30th but lenders will really having to start using this calculation now in anticipation of the change. If you had buyers prequalified with student loans in the past, I would highly recommend having them re-qualified because this is such a big change that it will make a difference to their purchasing power.
As always, please feel free to contact me with any questions or to prequalify any of your buyers.
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