1.2 trillion dollars. Thatâ€™s how much student loan debt the Millennial generation carries.
That debt causes many potentialÂ first-time home buyers to delay their purchase. But should they wait?
Apparently, the agency that oversees theÂ FHA loan program doesn'tÂ think so.
New guidelines on education loansÂ will make it easier for recent graduates -- and many othersÂ with student debt -- to get approved in 2016.
Effective immediately, student loan payment calculations have eased. FHA lenders will now use lower monthly payment estimates forÂ deferred student loans.
With low mortgage rates and easier qualification for college graduates, 2016 is turningÂ out to be a stellar year for younger home buyers.Click to see your FHA loan eligibility (Jul 21st, 2017)
Making the jump from renter to owner is one of the quickest ways to build wealth.
The homeowner controls -- and locks in -- their monthly housing costs. Plus, they benefit when their home appreciates.
For renters, this isnâ€™t the case.
Many new college graduates, though, are handcuffed to the renting lifestyle, simply because of student debt.
The average student loan debt a 2015 graduate is about $35,000 for a bachelorâ€™s degree, $51,000 for a Masterâ€™s and $71,000 for a Ph.D.
Those numbers are trending up, too. In 2012 students carried a median loan amount of $26,885. Compare that to just $12,434 two decades ago.
Student loan debt often weighs down graduates for years. There are plenty of 40-year-olds that are still paying down student loans. For them, student loan debt has spanned an entire generation.
Thanks to rule changes from Housing and Urban Development (HUD), the agency that oversees the popular FHA home loan program, graduates will have a much easier time qualifying for a home loan.Click to see your FHA loan eligibility (Jul 21st, 2017)
Many 2016 mortgage applicants with student loan debt will discover that their chances of buying a home are greatly improved.
In fact, student loans will probably affect their ability to buy a home a lot less than they think.
HUD recently relaxed FHA guidelines to get more former students into homes.
Many recent graduates have deferred student loans. They are not required to make payments until a certain amount of time after graduation. This gives them time to start their careers, and start earning a pay check.
This is an advantageous arrangement. But when these college grads apply for a mortgage, the lender must factor in future student loan payments. Often, no payment information is available.
In 2015, deferred student loan payments were estimated at two percent of the balance for FHA loans.
Thanks to 2016 updates, lenders will estimate deferred student loans at just one percent of the loan balance if no payment information is available. This effectively halves the impact of deferred student loans on your mortgage application.
Keep in mind that this rule applies to student loans for which no payment information is available. If the actual payment appears on the credit report or loan paperwork, the higher of the actual payment or 1% of the balance will be used for qualification purposes.
Yet, for applicants who can't document a future student loan payment, this seemingly small change can have profound effects FHA mortgage approval.
Take this example. A recent graduate finds employment straight out of college. She makes $4,000 per month. Her total monthly bills if she buys a home will be $1,500 per month including her future house payment, a car payment and a credit card.
She also has $20,000 in deferred student loans.
Under former rules, her estimated payment would be $400 per month. This puts her debt-to-income ratio at a level thatâ€™s too high to be approved.
Under new rules, the lender estimates her student loan payment at just $200, or 1% of her loan balance. Her debt-to-income is now within acceptable levels, and she is approved for a mortgage.
Even greater estimated payment reductions applyÂ with larger loan balances.
â€˘ $30,000 in student loans: $300 per month reduction in estimated payments
â€˘ $50,000 in student loans: $500 per month reductionÂ in estimated payments
â€˘ $100,000 in student loans: $1,000 per month reductionÂ in estimated payments
The applicant's buying power is increased by the amount that the estimated payment decreases. In other words, a home buyer with $50,000 in student loans can now be approved for a home payment that is $500 higher.
Keep in mind that if the actual payment is available, the lender will use that amount, if it is higher than the 1% estimate.
Furthermore, if 1% of the loan balance is greater than the actual payment on loan documents or your credit report, the lender must use the one-percent figure.
New FHA rules around deferred student loans, however, will open homeownership opportunities to an entire population that was locked out of owning a home just months ago.Click to see your FHA loan eligibility (Jul 21st, 2017)
First-time buyers represent a historically low percentage of the market in 2016. According to Realtor.org, new buyers made up 32 percent of all home buyers.
Thatâ€™s the second-lowest reading since the real estate trade organization started compiling data in 1981. First-time home buyer levels havenâ€™t been this low since 1987.
Lower numbers are caused, at least in part, by high student loan debt levels.
But first-time buyer participation could turn around sharply due to new FHA rules.
Ever-rising rents and all tax benefits of homeownership will spur renters to more seriously consider buying a home. And student loans may no longer stop them from going through with it.
Indeed, 2016 is turning out to be an ideal year for younger home buyers.
Mortgage rates unexpectedly hit 3-year lows recently. Rates were supposed to increase in 2016, but instead they dropped.
This opens up a rare opportunity for home buyers: recent graduates can afford more home for less money thanks to low rates.
Todayâ€™s lending environment is becoming increasingly accommodative to the younger home buyerâ€™s ownership goals.Click to see your FHA loan eligibility (Jul 21st, 2017)
If you have high student loan debt, consider an FHA loan, which has recently loosened its guidelines around estimated loan payments.
And, FHA loans come with some of the lowest rates of any loan type.
Get a rate quote while rates are low and guidelines are accommodative. You could be surprised at the home you qualify to buy right now.Click to see your FHA loan eligibility (Jul 21st, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
I enjoy reading The Mortgage Reports. The articles are informative with lots of good stats and trends.
Sandi C. Customer Service Representative
The Mortgage Reports has been extremely helpful in educating me about mortgages, and what is available. Thank you for all that you do!
Jerolyn C. CPA
The Mortgage Reports isn't just basic mortgage rate information -- it's analysis on rate changes and trends, and updates on the laws in lending. Subscribing to the site's daily updates is worthwhile.
2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)