By Robert G. Yetman, Jr. Editor At Large
I’ve written in various forums lately about how the student debt crisis has come to far outsize the issue of educational loan obligations, more singularly, and has resulted in further-reaching financial consequences for young adults beginning their journeys as mature consumers. Graduates carrying significant, monthly repayment obligations have found it more difficult to seamlessly enter the world of professional consumerism…cars, houses…with the money burdens lingering from school, and that unfortunate reality has stunted both their growth into full adulthood, as well as the growth of the economy, at large.
As it happens, conditions are not only not improving for this group, they have become just a little worse; the Federal Housing Administration, or FHA, one of the prime sources of low down payment mortgages, has recently made a key change to their borrower qualification standards that essentially makes “official” the increased financial hardships associated with massive student debt. Specifically, the agency has declared that two percent of a prospective, first-time borrower’s student loan balance must be included in the all-important debt-to-income ratio calculation, even if the loan is in deferment. Previously, loans that were in deferment for at least a year were excluded from DTI calculations. The debt-to-income ratio is one of the most important qualifying factors in obtaining a mortgage, and is a percentage expression of a prospective borrower’s monthly obligations versus how much he brings in each month; a debt-to-income ratio of 40 percent, for example, means that a person is paying out 40 percent of what earns in recurring monthly obligations. With an average student debt balance of around $30,000, this change now means that a typical, first-time mortgage loan applicant will have roughly $600 added to their list of monthly obligations, which will, in turn, push their DTI ratio higher, and perhaps to a point where he may no longer qualify for the mortgage.
The reality, however, is that as tough as this is on the younger borrower, it’s a prudent move; “deferred” loan payments are just that, deferred…they’re not canceled. This means that they will have to begin being made eventually, and when they are, the corresponding financial burden will have to be borne. This way, a more accurate, long-term debt picture of a prospective mortgagor can be known, thereby reducing (hopefully) the chances that he will fall into foreclosure down the road.