FHA Student Loan Guidelines: All Your Questions, Answered

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Stanley tate

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You're eager to buy a home, but you've been told in the past that your student loan debt is stopping you from qualifying for a mortgage loan. After a recent change to the FHA student loan guidelines, that may no longer be true.

In June 2021, the Department of Housing and Urban Development (HUD) adjusted its student loan rules about calculating student loan payments to make it easier for more Americans to become homeowners with an FHA mortgage. Ahead, I'll discuss the changes to the FHA student loan guidelines and more of what you need to become a homeowner with student loan debt.

What is an FHA loan?

An FHA loan is a government-backed mortgage insured by the Fair Housing Administration. The FHA, which was created to help combat the Great Depression by lowering the down payment amount needed to buy a home, doesn't make loans. Instead, the agency insures loans made by private mortgage lenders that meet its guidelines.

An FHA home loan is the only option for many first-time home buyers, especially if they have a low credit score, recent foreclosure or bankruptcy, or need a lower down payment.

Does FHA look at student loans?

The FHA program looks at federal and private student loans when calculating borrowers' debt ratios for homeownership. Your debt ratio, or debt-to-income ratio, compares your household's gross income with the minimum payments on your recurring monthly obligations. A lower DTI increases the chances of loan approval and impacts the amount you can borrow. The typical ratio for FHA borrowers is between 40 to 50 percent.

For years, the FHA rules for calculating student loan debt delayed many families' dreams of owning a home. However, a recent change aims to remove that barrier to getting an FHA home loan.

Old FHA Student Loan Guidelines

Under the old FHA student loan guidelines, borrowers with significant education debt faced a significant challenge to qualify for an FHA mortgage. The rules forced lenders to assume a borrower's monthly payment was 1% of their loan balance every month regardless of whether their actual payment was lower due to being in an income-driven repayment plan.

New FHA Student Loan Guidelines

In a move to help more Americans become homeowners, the Federal Housing Administration updated its student loan monthly payment calculations. The change to the guidelines removes the requirement that lenders calculate a homebuyer's monthly student loan payment at either 1% of the outstanding loan balance or an amortization-based payment. In its place, the new FHA student loan guidelines allow the lender to use either:

  • The actual payment amount for the student loan.
  • The monthly student loan payment reported on the borrower's credit report.
  • A .5% of the student loan balance if the reported payment status is zero.

"Homeownership is the cornerstone of the American Dream and the best way to build generational wealth," said Housing Secretary Marcia L. Fudge in a press release.

The new guidance can be used for loans made after August 15, 2021.

New FHA deferred student loan guidelines

Before the recent change, FHA guidelines forced lenders to use one percent of the loan balance when the student loan was in deferment or forbearance. The policy update, which is located in Mortgagee Letter 2021-13, allows lenders to use .5% of the balance for all student loans in deferment.

If the .5% payment amount raises your DTI calculation, consider holding off until you pay down some debt or applying for an income-driven repayment plan.

Examples of how to calculate student loan payment for FHA guidelines

The new FHA policy allows lenders to either use the actual payment reported on a credit report if it's above zero or .5% of the loan balance. Here are some examples:

  • Payment on credit report. Jane owes $200 thousand in Parent PLUS Loans. Her credit report shows that her monthly payment is $300. The lender will use the actual documented payment amount on her report.
  • Payment not on credit report. Thomas's outstanding balance on federal loans is $50 thousand, and the monthly payment on his credit report is $0. The lender will use $250 as his payment when calculating his debt-to-income ratio.
  • Payment $0 on credit report. Kelly owes $70 thousand in federal student loans. Her credit report shows that her monthly payment is $0. The lender will use $350 for her payment amount unless she asks her servicer to recalculate her monthly payment due to a significant change in income or family size.
  • Loan in deferment. Tracy owes $100 thousand in federal loans. Her credit report shows that her loans are in deferment. The loan officer will use $500 as their actual monthly payment unless they can get a payment schedule from their servicer showing a lower payment amount under an income-driven repayment plan when the deferment ends.

Eligibility Requirements for an FHA Loan

You're eligible for an FHA home loan if you:

  • Have a FICO score of at least 500.
  • Can verify your employment for the past two years.
  • Can verify your income through pay stubs, tax returns, and bank statements.
  • Will use the loan to buy your primary residence.
  • Have a front-end debt ratio of no more than 31 percent of gross monthly income (i.e., how much of your gross income is spent on housing costs).
  • Have a back-end debt ratio of no more than 43 percent of gross monthly income (i.e., how much of your gross monthly income is spent on housing costs and other monthly debt payments — credit cards, auto loans, etc.). Your lender could allow a ratio of up to 50 percent in some cases.
  • Not have loans in CAIVRS. If your federal loans are in default — even if they're not on your credit report — you'll need to bring your loans current before you're eligible for an FHA Loan. Read this Guide to Student Loan Default to learn your options.

Student Loan Guidelines for Home Buying

  • FHA uses the payment listed on the credit report or account statement, but if the loan is deferred or forbearance, the lender will use 0.5% of the outstanding balance.
  • Fannie Mae-backed conventional loan: accepts the monthly student loan payment listed on a credit report or account statement. But if the loan is in deferment or forbearance, the lender will use either 1% of the balance or one monthly payment.
  • Freddie Mac-backed conventional mortgage: allows borrowers to use either the payment on their report or account statement. If the loan is deferred or forbearance, the lender must use .5% of the loan balance.
  • USDA: uses the payment on your credit report or account statement unless your loan is deferred, in forbearance, or in an IDR payment plan. In that case, the underwriter will use either .5% of your loan balance or
  • VA loan: lets lenders use the payment listed on the borrower's credit report or account statement, or 5% of balance divided by 12 months, whichever is higher. But if the loan is in deferment, then the underwriter doesn't have to include the debt.

Bottom Line

Buying a home is an exciting step. But if you have a high student loan balance in comparison to your income, your debt could be an obstacle to homeownership. Thankfully, the changes to the FHA student loan make qualifying for a mortgage easier. Still, issues will pop up throughout the homebuying process. Schedule a free 10-minute phone call to speak with me about your loans and come up with a plan to get you into a home.

UP NEXT: Do Student Loans Affect Buying a House? All Your Questions, Answered

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