The FHA changed its guidelines in the summer of 2021 to stop using 1% of a borrower's outstanding student loan balance for their debt-to-income ratio. Now, lenders can use the borrower's actual student loan payment under an income-based repayment plan.
You're eager to buy a home, but you've been told in the past that your student loan debt will prevent you from qualifying for a mortgage loan. That may no longer be true following a recent change to the FHA student loan guidelines.
In June 2021, the U.S. Department of Housing and Urban Development (HUD) made it easier for more Americans to become first-time homebuyers by adjusting how it calculates student loan payments when determining a borrower's debt-to-income-ratio.
Ahead, learn about the changes to the FHA student loan guidelines and how to become a homeowner with student loan debt.
Old FHA student loan guidelines
Under the old FHA student loan guidelines, borrowers who had significant education debt found this debt became a barrier in qualifying for an FHA mortgage. These rules forced lenders to assume that a borrower's monthly payment was 1% of their loan balance every month regardless of their actual payment. This boxed out some borrowers who were in an income-driven repayment plan and had a lower payment.
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 removed 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.
This new guidance can be used for loans made after August 15, 2021.
"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.
New FHA deferred student loan guidelines
The new policy update, which is located in Mortgagee Letter 2021-13, allows mortgage lenders to use .5% of the balance for all student loans in deferment instead of the 1% it had used in years prior.
If the .5% payment amount raises your DTI calculation, consider holding off until you pay down some debt or end the deferment early and apply for an income-driven repayment plan.
FHA guidelines on student loan collections
FHA Guidelines prohibits people from getting a home loan if they have federal student loans in collections. They'll need to first get out of default and clear CAIVRS, which is the database that tracks collection accounts that are owed to the federal government.
There's no similar database for private student loans in collections. If the debt is still showing on your credit report, it will be included in your debt-to-income ratio, which means you'll need to establish a payment plan with the creditor or collection agency. If the student debt is no longer there, it likely won't affect your chances of having your home loan application.
Learn More: Defaulted student loan removed from credit report? Do This
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 DTI 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 she can get a payment schedule from her 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. 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 this case, the underwriter will use either .5% of your loan balance or the current documented payment under an income-driven repayment plan.
- 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. If the loan is in deferment, then the underwriter doesn't have to include the debt.
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 — even if you have a great credit score. Thankfully, the changes to the FHA student loan make qualifying for a mortgage easier. Still, issues ranging from documenting your repayment plan to needing to get out of default 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.