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Borrowers With Student Loans Might Have An Easier Time Qualifying For An FHA Loan In the past, a lot of potential borrowers were declined for FHA loans due to the presence of student loans. Now, the Biden Administration along with the FHA has eased a lot of their regulations surrounding student loans, making it easier for borrowers with student loans to qualify for a home loan. The FHA required that FHA mortgage companies calculated the monthly student loan payment as one percent of their outstanding loan balance if the loans were not fully amortized; however, this is now changing.

The One Percent Rule Is Not Always Accurate

Even though the one percent payment rule has been in place for a long time, it is not always the most accurate way of evaluating the size of a borrower’s potential loan payments. For example, a lot of students are on income-adjusted repayment plans, meaning they are not necessarily paying as much as one percent of the outstanding balance every month. This means that some borrowers were getting declined even though they may have had enough money to pay back the mortgage. With numerous borrowers owing more than $100,000 in loans, many applicants for homes were turned down.

New Guidelines Are Being Put In Place

Under the new guidelines, lenders can use a buyer’s actual monthly payment in terms of debt calculations even if that payment is less than one percent of the total balance of the loan. If the income-adjusted repayment plan means the borrower is not currently paying anything, then the lender will apply 0.5 percent of the outstanding loan balance every month instead of one percent.

A Boost To Borrowers With Student Loans

This change is significant because it alters the way lenders are calculating the debt-to-income ratio. If student loans are no longer making up a large portion of a borrower’s monthly debt payments in the calculation, they might have an easier time qualifying for a first-time home loan. Anyone with student loans who is interested in taking out an FHA loan should talk to a loan officer who is familiar with the updated guidelines. Even applicants who were denied in the past might have a chance to qualify for a home loan under the new rules.

Getting Your Mortgage Application Approved As A Self-Employed, First-Time Homebuyer A significant number of people are self-employed, which means they might be relying on this income to apply for a mortgage. It is true that people who are self-employed may face additional challenges when trying to get approved for a home loan when compared to someone with traditional W2 income, these are obstacles that can be overcome. With the right qualifications and documentation, even first-time homebuyers who are self-employed should be able to qualify for the home loan they need.

Lenders Assess Someone’s Ability To Repay The Loan

First, lenders are trying to make sure the person will repay the loan. Lenders believe that someone with W2 income has a stable job and a guaranteed salary, which means they are more likely to repay the loan; however, someone who is self-employed has other ways of demonstrating that he or she can repay the loan. Self-employed individuals can use tax returns, payroll receipts, and records from financial institutions that serve as documentation of the applicant’s income or assets. This means standard W2 forms and pay stubs might no longer be necessary.

Navigating Eligibility Requirements

Next, self-employed individuals need to meet the eligibility requirements. This includes two years of self-employment, a reliable income, a strong credit score with a clean credit report, cash for a down payment, and a low debt to income ratio. It is possible for a first-time homebuyer to get a loan for less than five percent down; however, closing costs can be significant. Realistically, first-time homebuyers should plan on spending close to five percent of the home’s value to get approved for a first-time home loan.

Understanding Mortgage Options

Finally, self-employed first-time homebuyers should be aware that there are multiple loan options available. For example, there are FHA and VA loans for those who qualify. USDA loans and jumbo loans might also be an option. There are bank statement mortgages and conventional options available as well. Self-employed individuals might have to visit several of these programs to see which ones work the best. The programs vary in terms of their down payment, minimum credit score, and credit history requirements. It is prudent to work with a professional loan officer who has experience helping self-employed, first-time homebuyers get approved.

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