FHA Student Loan Guidelines
One of the significant issues plaguing young adults is the amount of student debt they are incurring in recent years. According to Forbes, student debt is now the second highest consumer debt category ahead of credit cards and auto loans. There are 44 million students and graduates who owe an average of over $28,000 in student debt.
In recent discussions with various individuals in the workforce, many of them believe it will take years to pay off their student loans and in some instances, they are not even working in their field of study. This debt will have serious implications in their ability to qualify for an FHA loan.
Student Loan Definition
According to the HUD guidelines, the FHA Definition of a Student loan is “any loan that is incurred for educational purposes”.
FHA Student Loan Guidelines – In general, FHA lenders are required to use 1% of the student loan balance as part of the monthly obligations when determining whether the borrower meets the maximum debt to income ratio of 43%.
Effective April 2016, the FHA guidelines were once again revised and student loans are now excluded from deferred obligations and must be calculated and factored into the qualifying ratios.
FHA Student Loan Guidelines Rule Change
The following FHA student loan guidelines must now be followed when determining the minimum student loan payment amount used for qualification purposes:
- The lender must use the greater of 1% of the student loan balance, or
- The monthly student loan payment reported on the credit report, or
- The actual payment documented in writing if the student loan is not in deferment.
The new FHA student loan guidelines do not allow for deferred payments (delayed until a future date) to be excluded from the debt to income ratio calculation.
If the student loan payment reported on your credit report is less than 1% of your student loan balance, the lender is required to ignore that payment amount and use 1% of the loan balance for qualification purposes.
Only in rare circumstances will the lender have the ability to use the actual payment amount instead of 1% of the loan balance. It is for this reason that you should plan on using 1%.
Required Documentation to Qualify with Student Debt
The required student loan documentation other than the credit report will be determined by your lender depending upon your scenario.
The lender will likely ask for written documentation of your outstanding loan balance, terms, payment status and actual required monthly payment. The lender will request this information directly from the creditor.
Student Loan Qualification Example
In this example, Sally has an outstanding student loan balance of $28,000. The minimum monthly payment amount listed on her credit report is $95.
- If the original student loan document can be found, and the required payment amount matches the minimum payment listed on the credit report, then the FHA qualifying monthly payment obligation will be $95.00
- If the original student loan agreement documentation cannot be provided then the FHA qualifying monthly payment obligation will be 1% of the loan balance or $280.00
The difference between $280 and $95 will significantly impact Sally’s ability to qualify for a larger mortgage amount.
Is Student Loan Debt Handled Differently for FHA Loans?
FHA guidelines for how student debt is managed during the mortgage qualification process is not as lenient as it is with conventional loans. If you have a high student debt balance, you may find it easier to qualify for a conventional mortgage.
Can I Qualify for an FHA loan if my Student Loan is in Default?
FHA guidelines indicate that your FHA loan cannot be approved if you are delinquent on any government loan. Therefore, if your student loan is government backed and it is in default, then you likely will not be approved for an FHA loan.
FHA Student Loan Guidelines Summary
FHA rules make it tough to get a loan with student debt based upon how that debt is calculated and weighted against the borrower’s debt to income ratios. Still, you should not let student loans prevent you from purchasing a home or refinancing.
We suggest that you speak to one of our FHA lenders to truly know what you can borrow or how much home you can afford with student debt.
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