FHA Guidelines: Deferred Student Loans
UPDATE AS OF JUNE 21, 2021
Breaking News 6/21/2021
On June 17th, the US Department of Housing and Urban Development updated its student loan guidelines.
The policy updates apply to FHA home loans and change the way lenders calculate an applicant’s student loan payment when the loan is in deferral. Currently, lenders qualify applicants with a payment of 1% of the outstanding student loan balance. Even though the actual payment on the student loan documents or credit report is usually lower.
The new policy bases the monthly payment on the actual student loan payment. This should help more homebuyers with student debt qualify for an FHA mortgage.
Effective August 16th, 2021, lenders will qualify borrowers with deferred student loans this way:
- The monthly payment reported on the borrower’s credit report or 0.5% of the outstanding loan balance when the payment is reported as $0.
- The actual documented monthly payment when the payment is greater than $0.
The FHA hopes that the new guidelines will assist borrowers who take advantage of the various repayment plans that allow lower payments. Plans that previous underwriting guidelines ignored.
The adjustments to the policy should allow many FHA borrowers to borrow more than they could have previously. Most importantly, the new standard should increase the number of qualified borrowers and provide more opportunities for homeownership.
The Impact On High Student Loan Balance On FHA Loans
How Deferred Student Loans Can Disqualify FHA Borrowers
Underwriters include student loan payments in borrowers’ debt to income ratios. Even deferred student loan payments.
Those with advanced degrees such as medical or law degrees can have more than $100,000 in student loan balances. And their income is likely to come up quickly while their loans are in deferral. By ignoring this fact and adding a high monthly payment to their debt-to-income rations, even though they will have higher income by the time they actually start repaying these loans, FHA guidelines force these applicants into conventional (non-government) mortgages.
Loophole for FHA Borrowers With High Student Loan Balances
Per new FHA Guidelines Deferred Student Loans, FHA no longer exempts deferred student loans from borrower’s debt to income ratio calculations on student loans that have been deferred for more than 12 months.
Those who are employed but are also going to school consistently can normally get an extension on their student loans and get them deferred. Many times borrowers will have their student loan deferment expire in a few months.
As long as they are in school, they can request a deferment extension and would normally get it.
Unfortunately, FHA Guidelines Deferred Student Loans stated on HUD 4000.1 FHA Handbook, deferred student loans are no longer exempt from DTI Calculations.
Getting a Lower Hypothetical Monthly Payment
Homebuyers with large student loan balances need to contact their student loan provider and do the following:
- Tell them ” I am applying for a mortgage”
- “My lender needs a fully amortized monthly payment extended term
- Normally the maximum term student loan providers can extend to is 25 years
- This figure, which is normally 0.50%, can be used in lieu of the 1.0% of the student loan balance
VA Guidelines for Deferred Student Loans
Unlike FHA loans, VA Home Loans does have an exemption with deferred student loans. Deferred Student Loans that have been deferred for more than 12 months are exempt from debt to income calculations for veteran borrowers under VA Guidelines On Deferred Student Loans.
If deferred student loans have not been deferred for more than 12 months, then a fully amortized monthly payment over an extended term will be used.
For example, if the borrower has a $100,000 outstanding balance on a student loan and the student loan provider cannot provide a minimum monthly payment invoice, underwriters will use 1.0% of the $100,000, or $1,000 as the monthly student loan payment in calculating the borrower’s debt to income ratios. Or, underwriters will take 5% of the outstanding student loan balance and divide it by 12.
The yielding figure is the hypothetical monthly payment used on VA Loans.
Conforming Loans Allow IBR Payments on Outstanding Student Loans
Fannie Mae and Freddie Mac do allow income-based repayment plans on student loans. Borrowers with large outstanding student loan balances should see if they can qualify for conventional loans.
NON-QM Loans are portfolio loans with no waiting period after the housing event and no mortgage loan caps. NON-QM Loans do not count deferred student loans longer than 12 months.
To qualify for a mortgage with a mortgage company licensed in multiple states with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.