As Millennials become the dominant demographic in the housing market, the government has taken note of the reality for most Millennials that are in a position to purchase a home; crippling student loan debt. In an effort to address modern realities, the Federal Housing Administration (“FHA”), a unit of the Department of Housing and Urban Development (“HUD”), has decided to relax the way it measures student-loan debt in determining whether borrowers are eligible for assistance purchasing their homes; this change comes in tandem with the Biden administration's efforts to help lower-income borrowers and reduce the racial disparity in homeownership.
Over the past twenty years, student-loan debt has skyrocketed, while homeownership of the younger demographic has plummeted; most experts believe the two are related. On June 17, 2021, the FHA sent a letter to lenders, which was intended to enable more buyers to qualify for FHA loans. The change in how lenders analyze student-loan debt when determining eligibility for FHA loans brings the program in line with other government-backed loans.
Prior to the June 17, 2021 change, FHA loans assumed most people paying off their student-loans were making payments of roughly 1% of their balance; this inflated the would-be borrower’s debt-to-income ratio, and disqualified many otherwise qualified borrowers from FHA loans. Under the new metric, lenders will calculate what the borrower actually pays when assessing their debt-to-income ratio.
By way of example, one borrower was disqualified from an FHA loan because he had roughly $200k in student-loan debt. Under the old method, the banks assumed this individual was making payments of $2,000 per month and determined he simply did not make enough money to make his payments. Under the new methodology, this individual qualifies for the FHA loans because the lenders can take into account that he is currently making payments of $370 per month. This new method acknowledges the reality that many borrowers make “income-driven” payment plans, which amount to roughly 10% of their monthly “discretionary income.” Ironically, the income-driven repayment plans were adopted precisely because they didn’t want to financially cripple people who took massive loans to attend higher education; the FHA’s change brings lender policy in line with that goal.
As more Millennials qualify for FHA loans, the housing market will likely see an increase in demand when supply remains low. As such, the Sellers’ market is likely to continue for some time.
At the Chernov Team we understand that knowledge is power, and knowledge of how government policy impacts demand is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.