Under the current policy, borrowers’ total debt payments should not exceed 43% of their gross monthly income, and student loan debt must be included in this calculation. This means that a borrower’s monthly payments for student loan debt must be taken into account alongside their other debts when calculating their monthly payment-to-income ratio.
Housing groups are advocating for a change to this arrangement, arguing that student loan debt should not be considered in the same way as other types of debt in this calculation. They point to research by the Consumer Financial Protection Bureau which suggests that borrowers with high amounts of student loan debt are less likely to default on their FHA loans than borrowers with low amounts of student loan debt.
Proponents argue that borrowers with higher levels of student loan debt should be able to qualify for FHA loans, as they represent responsible borrowers who are willing to invest in their education. They also note that lenders would benefit from making more FHA loans to these borrowers, as the higher incomes and improved credit histories associated with higher levels of education typically result in more responsibly paying borrowers.
In addition to these arguments, some housing experts are also suggesting that lenders should make allowances for rising tuition costs, as these costs are often at the root of why borrowers find themselves in a situation where their student loan debt payments exceed the 43% threshold. They suggest that lenders should take the full cost of tuition into account when assessing a borrower’s ability to repay their loans, rather than just the amount of the monthly loan payments.
Overall, this debate speaks to the importance of providing access to FHA loans to all borrowers, including those with high levels of student loan debt. The current restrictions on borrowers with student loan debt could result in them being shut out of important opportunities to enter the housing market, and housing groups are advocating for changes to the FHA rules to prevent this from happening. It is unclear whether any changes will be made, but the issue is certainly one worth keeping an eye on.
The increasingly cost-prohibitive nature of higher education has caused many people to take on large amounts of student debt. The Federal Housing Administration (FHA) loan restriction requires that such borrowers include their student loan debt when determining their total debt-to-income ratio, which must remain below 43%. However, many housing groups are advocating for a more lenient approach to this restriction, noting that borrowers with higher levels of student loans are less likely to default on their FHA loans than those with lower amounts.
Various arguments have been put forward in favor of loosening the restrictions. Firstly, those with higher levels of education may have access to higher incomes and better credit statuses, thanks to the increased investment in their education. Secondly, lenders should also take into account rising tuition costs, rather than just the monthly loan payments that individuals have to make. Lastly, there is the argument of fairness: those who are willing to invest in their education should not be shut out from accessing important opportunities in the housing market.
At present, it remains unclear whether any changes to the FHA rule on student debt will be made. This has been a long-standing concern within the housing market, and it raises the important question of how best to provide access to home ownership opportunities for everyone, regardless of how much student debt they might have. The debate continues, but in the meantime, the FHA rule on student loan debt will remain in place, causing difficulties for many prospective home buyers with high levels of student debt.
This article was contributed on Nov 03, 2023
