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. Prior to a recent announcement by HUD in June of 2021, this debt would have serious implications in their ability to qualify for an FHA loan. However, the recent changes made qualifying for an FHA loan with student debt much easier.
The new FHA guidelines for student loans will require the lender so use the lesser of actual payment amount for the student loan, or .5 percent of the loan balance. This is a significant improvement for home buyers and will make qualifying for an FHA loan with student debt much easier.
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 – UPDATE September 2024 – FHA lenders are required to use the actual payment amount for the student loan (or .5% of the student loan balance when there is no payment requirement) as part of the monthly obligations when determining whether the borrower meets the maximum debt to income ratio.
Effective June 2016, the FHA guidelines were revised and required student loans to be factored into the qualifying ratios. The June 2021 change on how student loans are measured just made it much easier to qualify for an FHA loan.
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 actual payment amount for the student loan or
- The monthly student loan payment reported on the credit report, or
- A half percent (.5%) of the student loan balance if the reported payment is zero.
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 .5% of your student loan balance, the lender is able to use that lower payment for qualification purposes.
If you have no reported payment requirement for your student loan, you may contact the lender or student loan servicer asking them to agree to a low payment amount that is much less than .5% of the loan balance.
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 document can be found, and the required payment amount is lower than the minimum payment listed on the credit report, then the FHA qualifying monthly payment obligation will be that lower payment amount.
- If the original student loan agreement documentation cannot be provided then the FHA qualifying monthly payment obligation will be .5% of the loan balance or $140.00
The difference between $280 and $95 will significantly impact Sally’s ability to qualify for a larger mortgage amount.
FHA Student Loan Frequently Asked Questions
Can I Qualify for an FHA Loan if I Have Student Loan Debt?
Having student loan debt will not automatically prevent you from qualifying for an FHA loan. However, that debt may limit the loan amount you can actually qualify for.
Is Student Loan Debt Handled Differently for FHA Loans?
FHA guidelines for how student debt is managed during the mortgage qualification process is now just as lenient as it is with conventional loans. In the past you had a high student debt balance, you may have found it easier to qualify for a conventional mortgage. With the recent rule change, FHA and Conventional loans handle student debt in a similar fashion.
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.
Are FHA Guidelines Different than Conventional for Student Loans?
FHA does treat student loan debt differently than conventional loans. With FHA, the lender is required to use the actual payment amount or .5% of the student loan balance (if there is no payment) in your DTI calculation. With a conventional loan, if there is no payment then the lender does not have to use any amount in your DTI calculation.
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.