There are a lot of economic factors at play in that equation – rising interest rates, inflation, and home prices, to name a few – and early predictions say 2022 will see a slight decrease in home sales as mortgage rates tick up.
But changes this year might make homeownership more accessible for some. In the summer of 2021, the Federal Housing Administration (FHA) and the Federal National Mortgage Association, better known as Fannie Mae, started incorporating rental payments into their mortgage applications. It believes this could help 17% of eligible first-time buyers qualify for a loan.
The FHA also updated how it handles student loan debt and estimates that the change will impact 45% of first-time homebuyers who turn to it for loans.
These changes may impact homeownership rates in 2022. Let's take a look at each in more detail.
FHA’s changes to student loan debt
For years, the FHA required lenders to calculate a borrower’s student loan monthly payment as one percent of the outstanding balance if the loan wasn’t fully amortizing or in repayment. That requirement applied even to borrowers who were in approved forbearance or deferment and to those who had relatively small monthly payments under an income-based repayment plan.
Unfortunately, this rule made it nearly impossible for many people carrying student loan debt to qualify for a mortgage. And it was particularly burdensome for people of color. According to the Education Data Initiative, Black college graduates owe on average $25,000 more than their white counterparts.
However, the FHA’s new rule allows lenders to base their calculations on borrowers’ actual monthly student loan payments, which are often lower than one percent of the total balance.
This opens the door for many who had an unfavorable debt-to-income (DTI) ratio and is more in line with the FHA’s mission to help more first-time homebuyers get into a home.
Fannie Mae to use rental payments
Much like people with student loans found it difficult to qualify for an FHA loan, renters with limited credit histories were often frustrated when looking for a mortgage from Fannie Mae.
As Melissa Gasparek of Inlanta Mortgage explains, “Because landlords do not report rent payments to credit bureaus, even renters with a flawless track record of on-time rent payments weren’t seeing any effect on or benefit to their credit scores.”
But in August, Fannie Mae announced that if a first-time homebuyer has one year’s worth of on-time payments, they may now qualify for a home loan.
The process begins when a lender submits the original loan application to its automated underwriting system. If the loan is not eligible, the system checks for a 12-month history of rental payments. If it finds evidence of this, the lender can get permission from the applicant to order an asset report from a Fannie Mae-approved vendor. That vendor then sends the new information to Fannie Mae, which may determine the customer is eligible for the loan.
While this is a lengthy process, Fannie Mae estimates it can help 17% of originally ineligible borrowers get home loans. Moreover, using rental payments to predict mortgage performance is another important step toward equity in the housing market. According to Fannie Mae, about 20% of the population has a limited credit history, and people of color are disproportionately represented in that group.
Getting into the home-buying process
Even with these changes, remember that mortgage basics still apply, and that includes meeting other loan requirements.
For example, Dino DiNenna of Hilton Head Realty reminds people that they still want to “carry a credit score of 580 and have a down payment of 3.5%” to secure an FHA loan. And you’ll want to have a debt-to-income ratio of 43% or less in most cases.
Essentially, follow all the normal first-time buyer tips, such as working to improve your credit and eliminating as much debt as possible.
If you have questions about how the new rules affect you, talk to your mortgage representative.
