FHA Attempts to Help Borrowers with High Student Loan Debt, but it May Come at a Cost
At a recent 2016 Realtors Legislative Meetings & Trade Expo conference, U.S. Department of Housing and Urban Development Secretary Julian Castro announced changes to the debt-to-income (DTI) ratio for borrowers with student loan debt.
Secretary Castro said that the Federal Housing Administration (FHA) is cutting in half the amount of deferred student debt that counts against a potential home borrower’s DTI ratio from 2 percent to 1 percent. This means that if someone is applying for a FHA loan to buy a house and has $10,000 worth of student loan debt, the FHA will only factor in $100 instead of $200 when calculating the DTI ratio and determining if he/she qualifies for the loan.
The DTI ratio is a very important factor when determining whether someone can afford new payments on a mortgage loan. Individuals who spend a higher percentage of their income on debt payments are typically more at risk for defaulting on their loan payments.
Intentionally ignoring someone’s financial reality so they can buy a house is unwise public policy that can lead to instability in the housing market. Secretary Castro should reconsider his proposal and enact policy changes based on sound financial reality.