FHA Student Loan Guidelines
For borrowers with student loans, the Federal Housing Administration (FHA) has established specific guidelines that can significantly impact your ability to qualify for a mortgage. Understanding these guidelines is crucial for anyone in this situation, as it affects both eligibility and the loan amount you might qualify for.
Here’s a breakdown of the key FHA student loan guidelines you need to be aware of:
Treatment of Student Loan Debt
The FHA has detailed instructions for lenders on how to handle student loan debt during the mortgage approval process. These guidelines ensure that borrowers are not unfairly disqualified from obtaining a mortgage due to the size of their student loan debt or the payment plans they are on.
Monthly Payment Calculation:
Lenders are instructed to calculate your monthly student loan payment in one of two ways:
If the student loan is in repayment or scheduled to begin within 12 months, the lender must use the actual monthly payment reported to the credit bureau or the amount documented on the most recent loan statement. If the payment amount increases over time, the lender may use the current payment for qualification purposes. The repayment terms must fully amortize the loan over its term to qualify for this calculation.
For loans in deferment or forbearance, lenders will calculate a payment equal to 0.5% of the outstanding loan balance per month as the qualifying payment.
This is a shift from previous guidelines that recommended using 1% of the loan balance, making it slightly easier for borrowers with deferred loans to qualify.
More >> Problems with FHA loans or FHA Loan Requirements
Why The Student Loan Calculation Matters:
For many borrowers, how student loans are treated can significantly influence their buying power and the loan amount they can qualify for. By understanding these guidelines, you can better prepare for the application process. For instance, if you’re on an income-driven repayment plan with low monthly payments, it’s beneficial to know that lenders might still have to calculate a higher assumed payment for DTI purposes.
Calculating Your DTI with Student Loans
For FHA loan approval, your DTI (debt-to-income ratio) is a critical number. It measures your total monthly debt payments against your gross monthly income.
FHA requires that borrowers have a DTI of 43% or lower, though there are exceptions that can allow for higher ratios. This ratio includes the calculated student loan payment, which means the way your student loan debt is calculated can directly impact your eligibility.
Below are some examples of how to calculate the DTI. These calculations demonstrate how the assumed monthly payment for deferred student loans (using the 0.5% guideline) and the actual documented payment impact the DTI ratio.
Example 1: Borrower with $40,000 in Deferred Student Loans
- Deferred student loan balance: $40,000
- Assumed monthly student loan payment (0.5%): $200
- Actual documented monthly student loan payment: $150
- Other monthly debt obligations: $300
- Hypothetical monthly mortgage payment: $1,200
- Gross monthly income: $4,500
DTI Calculation with 0.5% Rule: DTI = (200 + 300 + 1,200) / 4,500) x 100 = 37.8%
DTI Calculation with Documented Payment: DTI = (150 + 300 + 1,200) / 4,500) x 100 = 36.7%
Impact: Using the actual documented payment slightly lowers the DTI ratio, potentially improving loan eligibility under FHA guidelines.
Example 2: Borrower with $60,000 in Deferred Student Loans
- Deferred student loan balance: $60,000
- Assumed monthly student loan payment (0.5%): $300
- Actual documented monthly student loan payment: $250
- Other monthly debt obligations: $400
- Hypothetical monthly mortgage payment: $1,400
- Gross monthly income: $6,000
DTI Calculation with 0.5% Rule: DTI = ((300 + 400 + 1,400) / 6,000) x 100 = 35%
DTI Calculation with Documented Payment: DTI = ((250 + 400 + 1,400) / 6,000) x 100 = 34.2%
Impact: Leveraging the actual documented payment can lower the DTI, which is beneficial for meeting FHA loan requirements and maximizing loan approval chances.
Example 3: Borrower with $80,000 in Deferred Student Loans
- Deferred student loan balance: $80,000
- Assumed monthly student loan payment (0.5%): $400
- Other monthly debt obligations: $500
- Hypothetical monthly mortgage payment: $1,600
- Gross monthly income: $8,000
DTI Calculation with 0.5% Rule: DTI = ((400 + 500 + 1,600) / 8,000) x 100 = 31.3%
other relevant FHA info
FAQs section
Can I qualify for an FHA loan if I have student loan debt?
Yes, you can qualify for an FHA loan even if you have student loan debt. The FHA has specific guidelines for calculating the impact of your student loan payments on your debt-to-income ratio (DTI), which is a crucial factor in determining loan eligibility.
How does the FHA calculate my student loan payments for DTI purposes?
For student loans in deferment or forbearance, the FHA guidelines dictate using 0.5% of your total student loan balance per month as the assumed monthly payment. If your student loans are in repayment, the actual monthly payment amount will be used, provided it can be fully amortized over the loan term.
What if my student loan is income-driven and has a $0 payment?
Even if your income-driven repayment plan results in a $0 payment, the FHA requires lenders to calculate a monthly payment for DTI purposes. This is typically done by assuming a payment of 0.5% of the total loan balance per month.
Will paying off my student loans improve my chances of getting an FHA loan?
Paying off your student loans can reduce your DTI ratio, potentially improving your eligibility for an FHA loan. However, it’s essential to consider your overall financial situation and consult with a mortgage advisor to make the best decision for your circumstances.
Can deferred student loans disqualify me from getting an FHA loan?
Deferred student loans do not automatically disqualify you from getting an FHA loan. The key is how these deferred payments are calculated into your DTI ratio. With the FHA’s guideline of using 0.5% of the loan balance as an assumed payment, many borrowers with deferred student loans still qualify for a mortgage.
How recent are the changes to the FHA’s student loan guidelines?
The FHA’s guidelines regarding student loans are subject to change. The most recent update, which adjusted the assumed monthly payment calculation from 1% to 0.5% of the outstanding loan balance for deferred loans, reflects the FHA’s ongoing efforts to accommodate borrowers with student debt. Always check for the latest guidelines or consult with a mortgage professional for the most current information.
Are there any special considerations for co-signed student loans?
If you are a co-signer on a student loan, that debt will be considered in your DTI ratio unless you can prove that the primary borrower has been making consistent payments on the loan for at least the last 12 months. Documentation will be required to exclude this debt from your DTI calculation.
