Who is this for: If you have student loan debt and you're looking to purchase a home.

Recently, the Federal Housing Administration (FHA) announced they are easing federal mortgage guidelines to give student loan borrowers a better shot at being approved for a home mortgage. They announced that they would be changing the student loan calculations, which should make it easier for student loan borrowers to obtain mortgage approval.

How does this help?

To understand how it helps you, let's try to understand some of the calculations. When you are borrowing for a mortgage, the bank (aka the lender), will go through an underwriting process to see how much of a risk you are, if any, to you not paying back the loan. One way they do this is to understand your income, current debts, and monthly payments. This helps them understand what you can and can't pay. Think of this as your personal cashflow. The current calculation is 1% of your outstanding student loans that are not fully amortizing or are not in repayment, which includes borrower in an approved forbearance, deferment, or income-based repayment plan.  

I'll provide you a brief example. Let's say you're a borrower with $75,000 in outstanding balance, you have an income of $50,000 per year and a family of 4. We'll also make the assumption that you are on an income-based repayment plan of $175 per month. Before the change, an FHA backed lender may assume that your payment is 1% of the outstanding balance, which would equate to $750 per month. With the change, a lender can use your actual payment of $175 per month, which is a difference of $575 per month.

If you're on a plan where your payment is $0, which is possible, the lender will automatically apply 0.5% of the outstanding balance as the assumed payment.

This change is super important as home ownership is the cornerstone for building wealth for most Americans. Buuuuuuuuuuut.... as a borrower, you want to be careful. You need to know if you can afford it or not. There's nothing worse than getting into a home only to have it taken away.