An FHA-insured loan is a great mortgage for first-time home buyers. It has easy to meet credit requirements. It requires a lower down payment. It has reduced closing costs. And it usually offers better interest rates.
But if you have student loan debt, qualifying for an FHA mortgage can be challenging.
In this post, I'll give you an overview of FHA mortgage guidelines for student loans.
Also, here's an interview I had with a senior mortgage officer about buying a home when you have high student loan debt.
What is an FHA loan?
An FHA Home Loan is a mortgage insured by the Federal Housing Administration. FHA Loans help first time home buyers qualify for a mortgage by requiring lower minimum downpayment and credit scores than many conventional loans.
To qualify for the maximum loan amount, you'll typically need, at a minimum, a 3.5% down payment with a credit score of 580 or higher. (FHA Guidelines, pg. 161)
Does FHA count student loans?
An FHA lender will count student loans in a borrower's debt to income ratio. The FHA guidelines require your mortgage lender to include your federal and private student loans in your monthly debt payments, no matter if they're in repayment or in deferment/forbearance.
Click here to read more about Do Student Loans Affect Buying a House?
How does FHA calculate student loan payments?
The FHA Guidelines allow your lender to calculate your student loan payments by using either:
- the monthly payment on your credit report or
- 1% of the total balance of your student loan debt.
Your lender can use the actual monthly payment on your credit report only if it is more than 1% of your outstanding student loan balance.
For many borrowers, the monthly payment amount on their credit report comes from an income-based repayment plan (IBR payment).
Your lender can't use that IBR payment if it's less than 1% of your balance.
In that case, they have to use 1% of your loan balance.
But there is an exception.
Your lender can use less than 1% of your loan balance if you get a payment schedule that amortizes (pays off) your student loan balance. (FHA Guidelines, pgs. 198-99)
How to get a payment schedule that amortizes your student loan balance
You can get a payment schedule that amortizes your student loan balance by contacting your student loan servicer. Tell the representative that "I am applying for a mortgage. My lender needs a monthly payment that fully amortizes my student loan debt."
For federal student loans, your loan servicer can amortize (pay off debt) your payments over 25 years.
Private student loans are trickier. Private lenders typically won't allow you to change your payment schedule. In that case, you may need to refinance your private student loans.
In my experience, it takes about 1-2 business days for your student loan servicer to send you that payment schedule.
Click here to get help from a student loan lawyer
Does FHA allow income-based repayment for student loans?
FHA Loans will allow borrowers to use income-based repayment for student loans in limited circumstances.
You can use the payment amount from your income-driven repayment plan, but only if that amount is more than 1% of your student loan balance.
For almost all student loan borrowers, their monthly payment under an IDR plan is significantly less than 1% of their loan balance. So they wouldn't be able to use their monthly payment amount under an IDR plan.
The only borrowers whose income-based repayment plan amount would be more than 1% are borrowers who:
- have a high income and
- are in the Revised Pay As You Earn Plan.
The other IDR plans cap your monthly payment. The REPAYE plan does not have a cap.
Fannie Mae backed conventional loans will allow you to use the payment from your IDR plan.
Does FHA count deferred student loans?
FHA Loans count deferred student loans. In the past, the FHA Guidelines allowed a lender to exclude student loans from DTI Calculations if the loans were in deferment for more than 12 months. Those guidelines were changed a few years back.
How does FHA treat deferred student loans?
FHA Loans treat deferred student loans as if the loans were in active payment status. This means lenders will ignore the actual monthly student loan payment listed on a borrower's credit report ($0). The lender will instead use either:
- 1% of the outstanding balance or
- an actual documented payment that amortizes the outstanding balance over time.
Can you get an FHA loan with student loans in default?
You can not get an FHA Loan with student loans in default. The U.S. Department of Housing and Urban Development (HUD) tracks all federal debt using the Credit Alert Verification Reporting System (CAIVRS) database.
If you're in default on a federal student loan, your mortgage underwriter will need proof you're out of default before you close.
Click here to learn How to Clear CAIVRS With Defaulted Student Loans?
Here are some FHA alternatives if your student loan debt prevents you from meeting the DTI ratio guidelines for an FHA Loan.
Apply for a conventional mortgage loan
Borrowers with a 700+ credit score may qualify for a Freddie Mac or Fannie Mae-backed conventional loan. Both loan programs make it easier to buy a home with high student loan debt.
- Freddie Mac Student Loan Guidelines
- Fannie Mae student Loan Guidelines
Apply for a VA Loan
Unlike FHA and USDA Loans, VA Loan Guidelines allow a lender to ignore your student loan debt if your loans are in deferment for more than 12 months beyond your closing date. In addition, VA Guidelines make home buying easier for veterans with high student loan debt.
Click here to read VA Student Loan Guidelines
Lower your debt and increase your income
If none of those other mortgage options work for you, homeownership is still within your reach.
But you have to focus on paying off your other debts and increasing your gross monthly income.
Admittedly, increasing your income is hard. You may find it easier to pay down your debt from credit cards, auto loans, medical bills, etc.