Outstanding student debt is the No. 1 thing holding Youngstown Neighborhood Development Corporation clients back from owning their own home, Housing Director Tiffany Sokol said.
But now, recent changes to federal loan requirements mean debt-saddled buyers have a bit more buying power. For those who have struggled to buy a home because of student loan debt or who have been rejected for a loan recently, now might be the time for a second look, local experts said.
“When you see the statistics about the lack of home purchases among young people specifically, a lot of that really is tied to student loan debt,” Sokol said, referencing articles that pose questions like, “Why aren’t millennials buying houses?”
“In really many cases, the answer is: They can’t because of the way their student debt impacts their debt-to-income ratio and the way banks look at them as a credit risk,” she said.
That’s why the U.S. Department of Housing and Urban Development’s change weeks ago to how graduates’ student loan payments are factored into Federal Housing Administration loans for low- to moderate-income homebuyers can be so transformative, local experts said.
More monthly obligations like vehicle or student loan payments make loan-seekers less likely to qualify. The new HUD rule essentially lessens the impact borrowers’ loan payments have on their FHA loan qualifications.
The previous rule factored in 1 percent of borrowers’ total debt when calculating their debt-to-income ratio. That meant the government would consider a graduate owing $50,000 as having a $500 monthly loan payment for the purposes of the loan qualification.
But low-income borrowers who are on income-based repayment plans — which could bring their payments to $0 — or whose loans are in deferment ended up looking like they were paying more under the old rule. This likely meant fewer indebted graduates were qualifying for those loans, said Matt Moore, a mortgage specialist with Amerifirst Poland.
The new rule cuts that default loan payment calculation to a half-percent, so that $50,000 in student loan debt would be calculated as a $250 monthly loan payment. That can be “a huge deal” for a loan-seeker who hasn’t qualified in the past or couldn’t get enough for the home they wanted, Sokol said.
In Ohio, about 1.8 million student borrowers combined owe more than $63 billion, according to a March report from Policy Matters Ohio on student loan forgiveness and how graduates can navigate their debt. Sixty percent of Ohio graduates owed an average of $30,000 in student debt in 2019, according to that report.
Loan officers can also factor in the borrower’s actual monthly payment amount, if it appears on their credit report, Moore said. If it’s lower, that also helps by improving borrowers’ debt-to-income ratio.
“Under this administration, they’re trying to relax some of the lending requirements just like in other areas,” Moore said. “I doubt many people know about this. This is a relatively new development, and … we’re trying to get the message out to homebuyers in the [Mahoning] Valley.
With this new rule change, an FHA loan may now be possible for someone who couldn't qualify months ago, or they "could get tens of thousands to $100,000 more, depending on the scenario,” Moore said.
“Fifty-thousand dollars or $100,000 in the Mahoning Valley goes a long way. That will also help to drive home values here in the Valley,” contributing to what Moore said is already a “hot” local housing market.
Early on in the COVID-19 pandemic, housing supply reached near all-time lows, as fewer people chose to put their homes on the market and move "amidst all the uncertainty,” Moore said. But demand from new homebuyers didn’t go anywhere. That’s part of what led to such “significant” increases in home values recently. The other part is low interest rates.
“People should reach out to a local lender and see what their options are,” Moore said. “It’s not quite a sweeping solution, but it is a big step in a positive direction to increase home ownership here in the Valley and across the country.”
YNDC, which offers free HUD-approved housing counseling, has been advocating for this kind of “positive” change for a year, Sokol said.
“We’re really excited to speak with all our clients coming in over the next month,” she said. “For many of them, this could change their outlook on home ownership.
“With this change, it’s going to impact a lot of people,” Sokol said.