This guide covers FHA guidelines on student loans. We will discuss how large student loan debt can affect homebuyers from meeting the maximum front-end and back-end debt-to-income ratio cap. Homebuyers with student loans are often facing obstacles when trying to qualify for an FHA-insured home loan.

FHA guidelines on student loans no longer exempts deferred student loans that have been deferred for more than 12 months.

In the past, for any student loans that have been deferred for at least 12 months, that monthly payment was exempt from debt to income ratio calculations. This held true no matter how much the balance of the student loan was. In the following paragraphs, we will cover the updated FHA guidelines on student loans. We will discuss how mortgage underwriters calcualte hypothetical debt payments on deferred student loans, income-based repayment, and student loans in default.

HUD Guidelines on Deferred Student Loans

The prior FHA guidelines on student loans exempting deferred student loans from DTI calcualtions benefited college graduates as well as those professionals with advanced degrees such as medical doctors, attorneys, and dentists with high student loan debt.

Deferred student loans extended longer than 12 months are no longer ignored and is now taken into consideration in the borrower[s DTI calculations:

Deferred student loans are now part of the debt-to-income ratio calculations for FHA loans. Conventional loans always allowed Income-Based Repayment to be used for debt-to-income ratio calculations.  This holds true as long as the IBR Payments are good for the next 12 months and reports on credit bureaus. The great news is HUD is now allowing income-based repayment to be used on FHA loans.
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How FHA Guidelines on Student Loans Impact Millennial Homebuyers

Millennials make up the largest group of first-time homebuyers. Unfortunately, most millennials also have large student loans. Large student loan debts will affect borrowers when buying their first home. This was not a problem when HUD did not count student loan debt on deferred student loans in the calculation of the borrower’s debt-to-income ratios.

College students have two times as much student loan debt today as they did twenty years ago. Cost of tuition, room and board, is expected to surge in the coming months and years.

Statistics show that the median student loan debt amount in 2013 was $27,000 today.  Twenty years ago, it was just over $12,000. There are many colleges and universities today where tuition and room and the board can surpass $50,000 per year. However, deferred student loan debts that have been deferred for 12 or more months are no longer exempt from DTI calculations on FHA loans.

Getting Approved For an FHA Loan With Large Student Loan Debts

Student loan debts are long-term debts and the borrower may be liable for decades after graduating from colleges and professional schools. The underwriter will need to determine the borrowers’ debt-to-income ratios with outstanding student loan debts. The underwriter will take hypothetical monthly expense if 0.50% of the outstanding student loan balance if the loan is in deferment.

Students who graduate with undergraduate degrees and go to graduate and professional schools can easily rack up hundreds of thousands of dollars in student loan debt.

A recent study found that a recent college graduate with student loan debts who is a first first-time home buyer and want to purchase their first home would have to make over 35% more a year, or $9,000 more, than a home buyer who just graduated from college with no student loan debt. This study was conducted by RealtyTrac.

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HUD Guidelines on Student Loans 

HUD’s FHA guidelines on student loans is stated in the Mortgagee Letter (ML) 16-08 for FHA Case Number which is assigned on or after June 30, 2016. The Mortgagee will need to state and include the borrower’s monthly student loan payments which are shown on the borrower’s credit report, the borrowers’ student loan agreement.

The student loan borrower’s payment schedule statement will be used by the mortgage underwriter to calculate the monthly student loan debt payments in the calculations.

In the event, if the borrower’s credit report does not reflect nor show the monthly student loan debt payment, the Lender needs to include the monthly student loan debt payment which is stated in the borrower’s student loan agreement or the student loan payment statement.

Income-Based Repayment FHA Guidelines on Student Loans

If the mortgage underwriter will be using the monthly student loan debt payment which is reflected on the borrower’s credit report in order to calculate the borrower’s debt-to-income ratios, no additional paperwork or documentation will be necessary.

In the event, if the borrower’s credit report does not reflect a monthly student loan debt payment for the student loan and the student loan debt is in deferment, the underwriter will take 0.50% of the outstanding student loan balance and use that number as a hypothetical debt.

In the event, if the student loan payment debt on the borrower’s credit report is greater than the actual monthly student loan debt obligations by the borrower, the underwriter will require documentation.  Lenders will require the borrower to get documentation or the student loan agreement to correct the discrepancy. Mortgage underwriter need to get proof of the student loan debt agreement or the student loan debt payment statement which reflects the actual monthly student loan debt payment.

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DTI FHA Guidelines on Student Loans

Student loan debts that are not in deferment are classified as an installment loans under HUD: The Federal Housing Administration will be counting the actual monthly student loan debt payment of the borrower of the student loan debt.  Case scenarios of these types will also include the exact month student loan debt payment for the student debt obligation which is being repaid under the IBR.

Borrowers on income-driven repayment plans may have their monthly payment considered for DTI purposes, even if the actual payment is lower than 0.50% of the outstanding balance.

Income-based repayment plans, in many instances, have the actual monthly student loan debt payment as zero dollars per month.  Income-based repayment is based on the borrowers gross income. HUD now allows IBR payments. Fannie Mae and Freddie Mac allow IBR Payments that report on all three credit bureaus to be used on Conventional loans.

FHA Guidelines on Past Due Student Loans

HUD does not require paying off charge-off and collection accounts for borrowers to qualify for FHA loans. HUD allows for medical collection accounts and charged-off with outstanding unpaid balances exempt from debt-to-income calculations. No portion of the unpaid balance can be used for DTI calculations.

On non-medical collection accounts that total more than $2,000, HUD requires that 5% of the outstanding unpaid collection balance be used for the borrower’s debt to income calculations.

Borrowers do not have to pay any outstanding collections or charge-off accounts even though the mortgage underwriter will use 5% of the outstanding collection account balance as a hypothetical debt. If the borrower’s student loans are in deferment or forbearance, lenders might use 0.50% of the outstanding balance as a hypothetical monthly payment for DTI calculations. Borrowers typically need to provide documentation of their student loans, including the current balance and terms of the loan.

HUD Guidelines on Deferred Student Loans

The HUD guidelines exempting deferred longer than 12 months from debt-to-income ratio calculations was a great benefit for first-time homebuyers with high student loan debts. FHA mortgage lenders usually consider monthly payments on student loans when assessing a borrower’s debt-to-income ratio (DTI). If the borrower’s student loans are in deferment, lenders might use the hypothetical 0.50% of the outstanding balance or the actual documented payment, whichever is higher.

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HUD Guidelines on Non-Deferred Student Loans

For loans not in deferment, the lender generally considers the actual monthly payment reported on the credit report. If the borrower is on an extended or graduated payment plan, the lender may use the actual payment or a higher amount depending on the terms of the plan.

Written Payment Agreement on Collection Accounts

If 5% of the outstanding collection balance is too much and will disqualify the borrower, then HUD will allow the borrower to enter into a payment agreement with the collection agency or creditor. Whatever the payment agreement monthly payment amount is, that amount will be used as a monthly debt payment.

The agreed monthly payment plan amount on the written agreement will be used in the calculations of the borrower’s debt-to-income ratios.

If the borrower enters in to a written payment agreement with the creditor or collection agency, there is no seasoning requirement. As long as the borrower can provide the written payment agreement, then the borrower can qualify and is ready to go.

Importance of Cairvrs and Government Loans

The exception to collection accounts and the past due account is with government student loans. Any student loan debt that is guaranteed by the federal government cannot be in collections and if they are past due, the past due amount needs to be current. It needs to be in good standing for a borrower to qualify for an FHA loan or any other government loan such as VA and USDA loans.

Remember that guidelines can change, and lenders may have variations in how they interpret and apply these rules.

It’s crucial to consult with a qualified mortgage professional or directly with an FHA-approved lender to get the most accurate and current information tailored to your specific situation. It does not matter how high the borrowers’ credit scores are or if all other payments to other creditors are current. The federal government does not want you to have any government-backed student loans in arrears or in collections in order to qualify for FHA loans. This also holds true for any other government loans.

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