A slight change to the guidelines that dictate Federal Housing Administration (FHA) loans has increased the difficulty of obtaining a mortgage. The new guideline directly affects debt-to-income ratio. Now student loans are going to factor into the debt-to-income ratio in a way that effectively bars potential borrowers from qualifying for an FHA loan.
Debt-to-income ratio is a ratio, or percentage, of the total income versus the amount of debt owed. Since the definition sounds like the keyword just rewritten, an example is the best way to describe debt-to-income ratio. If someone makes $5000 a month while owing $2000 each month, then their debt-to-income ratio is 40%. This ratio is a considerable factor for lenders who are reviewing a potential borrower’s application for any sort of loan including student loan options as well as mortgages. A lower debt-to-income ratio is favorable and increases the chances of borrowing a loan.
Previous guidelines dictated that student loans in deferment would not be factored into the underwriting process. This opened up mortgage approval rates for new graduates out of college since graduates appeared to have a much lower debt-to-income ratio. These guidelines were not going to last.
A new set of rules will be in effect at the end of the 2016-2017 academic year. Instead of ignoring deferred student loan debt, lenders must factor in either the full amount of deferred loans or 2% of the deferred amount.
These new guidelines have noticeably restricted FHA loan approval amounts by making it harder to qualify for larger loans. The new system either disqualifies graduates or lowers the total loan amount they are eligible.
At any rate, these new changes are plausible because they factor in debt that exists. By ignoring debt in deferral, it ignores basic criteria for debt-to-income ratio. The debt is still there, or in the words of Brian Sullivan, “debt is debt, deferred or otherwise.”
This sheds light on the effect student loans have on graduates. It has been shown to affect home ownership and other types of funds down the road; additionally, there is a high rate of student loan default. Now the approval guidelines for an FHA loan reflect these effects. It will be harder for adults with educational loan debt to get a mortgage for a house. While this may seem like an issue, it sets priorities on eliminating certain types of debt before bringing in more debt.