FHA Deferred Student Loans Requirement And How It Affects DTI

This Article Is About FHA Deferred Student Loans Requirement And How It Affects DTI

Higher education tuition is extremely expensive and it is almost impossible to enroll and attend college these days without student loans.

  • Higher education expenses can surpass $30,000 per year at state colleges and universities
  • Private colleges and universities can easily surpass the $50,000 mark annually to attend
  • Many college graduates accumulate more than $100,000 or more in student loans by the time they graduate
  • Often times have their student loans deferred
  • Deferred student loans can become a problem for those college graduates who need to qualify for a residential mortgage loan
  • FHA Deferred Student Loans Requirement has changed where deferred student loans are no longer exempt from DTI Calculations
  • Deferred student loans, with the exception of VA Loans, are no longer exempt from DTI Calculations
  • FHA Deferred Student Loans Requirement used to have favorable unlike conventional mortgage lending guidelines but now it is no longer the case

In this article, we will cover and discuss FHA Deferred Student Loans Requirement And How It Affects DTI.

Conventional Mortgage Lending Guidelines

What are Conventional Mortgage Lending Guidelines

Deferred student loans on conventional loans have changed for the better. We will discuss the old rules versus the new rules on conventional loans. Fannie Mae and Freddie Mac are the two mortgage giants that regulate conventional mortgage guidelines.

Great news with Conventional Loans is that Income-Based Repayment (IBR) can be used in DTI Calculations as long as it reports on credit bureaus:

  • If student loans have no monthly payments on the credit report, Fannie Mae and/or Freddie Mac mortgage guidelines want lenders to take 1.0% of the student loan balance and use that number as a monthly debt payment.
  • This payment is used in DTI Calculations
  • The old rule to qualify was to take 2% of the student loan aggregate balance amount in calculating the monthly payment
  • 2.0% has now been changed to 1.0%

For example, here is a case scenario:

  • A borrower who has a $100,000 student loan balance
  • With the old Fannie Mae Guidelines, 2% of the balance or $2,000 per month was taken as a monthly debt for the underwriter to use to calculate the debt to income ratio
  • With the new guidelines, only 1.0% can now be used if there is no monthly payment reporting on credit bureaus
  • Borrowers who make $50,000 and higher student loan balances will have a difficult time qualifying for Conventional Loans if they do not have an IBR payment set up

Borrowers with deferred student loans can make IBR payment arrangements with their student loan providers to qualify for conforming loans.

What Are FHA Deferred Student Loans Requirement

The old FHA Deferred Student Loans Requirement was to exempt student loans that have been deferred more than 12 months from debt to income ratio calculations. This rule has now changed. All deferred student loans, no matter how long they have been deferred, are no longer exempt from DTI.

  • With the old FHA Guidelines, it used to be in the event of the borrower is still in school, they can get a letter from student loan provider that the student loan is still deferred while they are still in school
  • The only way student loans that were deferred was counted in DTI calculations was if the student loan was deferred less than 12 months
  • Then deferred student loans monthly payments are calculated in borrower’s monthly debt to income calculations

FHA and USDA have the same guidelines on deferred student loans.

VA Loans

What is va loans

VA Loans is the only mortgage loan program that exempts deferred student loans in debt to income ratio calculations. Under VA Guidelines On Deferred Student Loans, any student loans that is deferred for more than 12 months are exempt from debt to income ratio calculations.

For non-deferred student loans here is how VA counts student loan payments:

  • Take 5% of the outstanding student loan balance
  • Divide it by 12 months
  • The resulting figure will be the figure used as hypothetical monthly student loan debt

Solutions To High FHA Deferred Student Loans Requirement

Borrowers who have high balance student loans and need to qualify for a mortgage have options.

  • Gustan Cho Associates has no lender overlays on government and conventional loans
  • HUD allows higher debt to income ratios than Fannie Mae and/or Freddie Mac
  • For home buyers with higher DTI, FHA Loans allow up to 46.9% front end and 56.9% back end debt to income ratio to get AUS Approval

FHA Deferred Student Loans Requirement And How To Get Lower DTI

How To Get Lower DTI

Here is a way where borrowers can qualify for FHA Loans with high student loan balances:

  • Need to use the following verbiage
  • Contact student loan provider
  • Tell them that you are applying for a mortgage
  • Tell them that the lender is requiring a fully amortized monthly payment on the maximum extended term possible
  • The extended payment term is normally 25 years
  • This figure is normally 0.50% of the student loan balance 

Following the above instructions should help borrowers with high student loan balances.  Nothing needs to be changed. Borrowers on deferred student loan plans do not have to change them. The above instructions are just theoretical and all is needed is a written statement showing a hypothetical case. Underwriters will take this. Please do not hesitate to contact us at Gustan Cho Associates with any questions in qualifying for a mortgage with high student loan balances at 1-262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

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