Student Loans May Affect Mortgage Eligibility Less

Last month, the Class of 2016 celebrated the end of school. And while some new grads received cars, money and other exciting gifts, they all received a great present from an unexpected source: the Federal Housing Administration.

Effective June 30, the FHA halved the percentage used to calculate monthly payment estimates for deferred student loans -- that is, loans not currently in repayment. This means that recent grads as well as first-time homebuyers with student loans may now qualify for a mortgage.

FHA Loans

FHA loans are a popular option for first-time homebuyers. The federal government insures these loans, allowing lenders to potentially offer better deals, and the loans' down payments can be as little as 3.5 percent.

Earlier this year, the Student Loan Ranger dug into how student loans affect eligibility for FHA loans. In short, quite a bit -- lenders want to evaluate how borrowers will handle their existing student loan debt before giving them mortgage debt.

[Learn three tips for securing student loan forgiveness.]

Lenders do this by looking at a borrower's debt-to-income ratio. This helps them determine whether borrowers can handle a mortgage payment based on their income and other financial responsibilities. More favorable ratios equal a higher likelihood of being approved for a loan.

Debt-to-income ratios come in two varieties: front end and back end. The front-end ratio only considers housing-related debts -- mortgage payments. for example. The back-end ratio looks at all recurring monthly debts, such as student loans. Currently, the thresholds for FHA loans are 31 percent for front-end ratios and 43 percent for back end.

One challenge lenders face when calculating the back-end ratio is determining how to include deferred student loan debt. Because these loans do not have a set monthly payment, lenders must estimate a monthly amount. Like any estimate, this may not be accurate -- especially if a borrower qualifies for a low income-driven repayment amount.

[Understand four income-driven student loan repayment plans.]

Before the new guidance, lenders used 2 percent of the outstanding debt as the standard for deferred loan amounts. This, by itself, was a recent change, since lenders did not consider these payments at all before September 2015.

Now, the FHA has sliced that 2 percent in half. This should qualify more borrowers while still mitigating some risk for lenders.

Going from 2 percent to 1 percent may not sound like much. But this small decrease could have a big effect for borrowers -- especially those with large debts.

The Class of 2016 follows the trend of graduating as the most indebted yet. Estimates put the average debt per student at $37,173.

With the 2 percent calculation, that average amount when deferred would have counted as $743. Now, that shrinks to $371.

This increases borrowers' purchasing power by that same amount. Put another way, a lender could now approve these borrowers for a mortgage that is $371 greater per month. For many, these amounts could be the difference between owning a home or not.

But choose wisely. Student loans should not stand in the way of your dreams, like buying a home. With this change, the FHA makes this goal more attainable for some borrowers.

[Learn the 5 steps to financial independence in your post-college life.]

However, do not rely solely on a calculation when determining whether buying a house is right for you. Take an honest look at your debt, budgeting and spending and decide for yourself. Remember, you will not only take on a mortgage payment but also all the other costs associated with home ownership.

And, of course, just because a lender qualifies you for more debt does not mean you should take on that amount. Many learned that lesson the hard way -- and hopefully history won't repeat itself.

Ryan Lane is the senior editor for American Student Assistance, where he oversees the financial website saltmoney.org and serves as the editor of the SALT Blog. He graduated from Syracuse University with a B.S. in journalism.