2017 FHA Guidelines On Deferred Student Loans

This BLOG On 2017 FHA Guidelines On Deferred Student Loans Was Written By Gustan Cho NMLS 873293

2017 FHA Guidelines On Deferred Student Loans under HUD 4000.1 FHA Handbook requires a monthly fully amortized student loan payment amount over an extend term. Even though borrowers have student loans deferred for over 12 months, lenders need to either take 1.0% of the student loan balance or get a written proposed amortized monthly payment by the student loan provider. Not too long ago, borrowers who had student loans that were deferred for longer than 12 months were exempt from taking the student loan into consideration when calculating the borrower’s debt to income ratio. Unfortunately, this is no longer the case and deferred student loans are now taken into consideration in the DTI calculations of the FHA Borrower under 2017 FHA Guidelines On Deferred Student Loans.

Overlays Versus 2017 FHA Guidelines On Deferred Student Loans

Lender Overlays are when a lender has higher FHA Requirements than those of HUD Guidelines.

Here are some examples of overlays a lender may require:

  • To qualify for a 3.5% down payment FHA Mortgage, a borrower needs a credit score of 580 FICO.
  • Many lenders will not accept any borrowers who have at least a 620 FICO credit score.
  • Lenders need to at least meet the minimum FHA Guidelines, however, they can always require higher standards than those implemented and required by HUD. 
  • This higher standard required by lenders is called a lender overlay.
  • It is perfectly legal for lenders not to accept the minimum credit score HUD Requires and require a higher credit score than the 580.
  • If a lender requires a 620 credit score on their FHA Loan Programs, then the lender has an overlay on credit scores.
  • Bottom line is that just because a borrower cannot qualify at one lender, that does not mean that the borrower will not qualify at another lender.
  • For example, most banks have overlays on credit scores and requires a 640 FICO credit score when FHA only requires a 580 FICO.

Lender Overlays On Deferred Student Loans

Now since I explained what overlays are, I like to note that there are lenders that have overlays on deferred student loans. Per 2017 FHA Guidelines On Deferred Student Loans, there are two ways of calculating the borrowers monthly obligations when determining debt to income ratios:

  1. A mortgage underwriter can take 1.0% of the student loan balance and use that figure as a monthly debt in the calculation of the student loan.
  2. The borrower can contact the student loan provider and get a monthly payment amount that is fully amortized over an extended payment plan.

Under option #2, the borrower does not need to take their student loan out of deferment and can just get a printout of the terms and conditions if the deferred student loan were to be out of deferment. Unfortunately, there are lenders that have overlays on this where they will not accept option #2 unless the borrower actually were take their student loans out of deferment. So what happens on situations like this is that borrowers need to opt for option #1 where 1.0% of the outstanding student loan balance will be used as the monthly debt of the borrower. This can create a problem where the monthly debt will be very high, especially for those borrowers who have large student loan balances like doctors, lawyers, and those with graduate degrees from private colleges and universities.

How To Get Monthly Amortized Payment From Student Loan Provider

Borrowers with large balances on their Deferred Student Loans can have issues when qualifying for a FHA Loan. If we take a loan case scenario where a borrower has $100,000 in deferred student loans and go over this scenario on how to make it work. Here is how a loan officer should qualify a borrower with deferred student loans:

  • $100,000 deferred student loan balance.
  • 1.0% of this will be $1,000 per month under option #1.
  • However, getting a proposed amortized monthly payment by the student loan provider will get this figure down to about $500 per month.
  • The borrower needs to contact the student loan provider and tell the representative that they are applying for a mortgage.
  • The loan officer can be on a three way conference call with the borrower and student loan provider representative.
  • The borrower needs a fully amortized monthly payment amount if the deferred student loans were out of deferment over an extended payment plan which is normally 25 years.
  • Remember that it needs to be fully amortized and cannot be an income based repayment plan or IBR.
  • This figure should be around 0.50% of the outstanding student loan balance which is around $500 on a $100,000 balance student loan amount.
  • The loan officer can take the figure that was given over the phone and use that amount as the borrower’s monthly debt when calculating the borrower’s debt to income ratio.
  • The lender will need a letter confirming the monthly amortized amount which may take a day or two for the student loan provider to send to the borrower.

If you have a large balance on your deferred student loans and need a mortgage lender with no overlays to help you, please contact The Gustan Cho Team at CrossCountry Mortgage at 262-878-1965. You can text Gustan at 262-716-8151 for faster response. Or you can email us with your mortgage inquiries at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays. CrossCountry Mortgage NMLS 3029 is a national five star lender licensed in 50 states with no overlays on all government and Conventional Loans. We have no overlays on FHA debt to income ratios and will go up to 56.9% DTI per the maximum allow under HUD. There are no debt to income ratio requirements on VA Loans and the maximum DTI allowed with Freddie Mac is 50% DTI.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

3 Comments

  1. Gustan Cho says:

    Deferred Student Loans are exempt on VA LOANS

  2. Queen VLG says:

    What about student loans in collection? How do you go about getting a house if your score is 637?

    • Gustan Cho, NMLS 873293 says:

      You need to get studend loans out of collections in order to pay qualfiy for collection loans.

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