FHA Guidelines On DTI And Student Loans Versus Conventional Loans

This BLOG On FHA Guidelines On DTI And Student Loans Versus Conventional Loans Was UPDATED And PUBLISHED On July 22nd, 2019

Student loan debt can be a major obstacle when qualifying for a home loan. The two largest issues that affect debt to income ratios on mortgages are student loans and car payments.

• FHA used to have extremely lenient FHA Guidelines On Student Loans
• Borrowers with deferred student loans that was deferred for at least 12 months could exclude the potential student loan payments from debt to income ratio calculations in the past but not anymore
• Unfortunately, under HUD 4000.1 FHA Handbook which was launched September 14, 2015, all deferred student loans will be counted in the debt to income ratio calculations
• Even if the student loans have been deferred for longer than 12 months, student loan payments will now count on FHA Loans
• Professionals who have graduate or professional degrees such as doctors, dentists, pharmacists, attorneys, and engineers can have substantial student loan balances
• Many consumers have student loan balance exceeding north of six figures
• I have run into borrowers who had student loans with balances greater than $300,000
• Some even higher than $500,000
• Government-backed student loans cannot be delinquent
• Cannot be in collections in qualifying for FHA Loans
• FHA does not require borrowers to pay off outstanding collection accounts or charge off accounts
• However, since FHA is a government entity, borrowers cannot be delinquent and/or have government loans or debts owed to the government such as tax liens to qualify for FHA Loans
• FHA is not a mortgage lender
• FHA’s function is to insure FHA Loans that are originated and funded by mortgage companies that are FHA lenders
• FHA guarantees and insures lenders in the event borrowers default on their FHA Loans and lender takes a loss

FHA Guidelines On DTI And Student Loans: New Student Loan Guidelines

There are new FHA Guidelines On DTI And Student Loans is effecting many home buyers with higher student loan balances:

• The new FHA Guidelines On DTI And Student Loans is already in effect
• FHA case numbers that have been ordered prior to June 30th, 2016 did affect borrowers with large student loan balances
• Unfortunately, many lenders have already put this new FHA Guidelines On DTI And Student Loans into effect for quite some time
• All FHA case numbers that are ordered after June 30th, 2016, which is FHA case numbers the monthly student loan payments that FHA is going to be requiring mortgagees to use as a monthly student loan payment will be the following:
  • The mortgagee will need to use the greater amount of one percent of the outstanding student loan balance on the student loan
  • Or the borrower’s monthly student loan payment that is reported on the FHA borrower’s student loan payment that is reflected on the FHA borrower’s credit report
  • Or the actual dollar amount that is documented as the borrower’s monthly payment provided that the student loan payment will fully amortize the student loan over the term of the student loan

Case Scenario Of Borrowers With High Student Loan Debt

Let’s take a case study example:

• FHA borrower has a $75,000 student loan balance
• The fully amortized student loan payment is $400.00
• The monthly student loan payment that will be used to qualify is $400.00 per month

Let’s take a case scenario

• FHA borrower has a $200.00 student loan payment
• It is an income-based repayment (IBR)
• Or interest only student loan payment
• Those student loans do not fully amortize the student loan over an extended term
• Then 1.0% of the student loan balance will be used as a monthly debt and used in debt to income ratio calculations
• On this case, 1.0% of the $75,000 will be used or $750

This new FHA Guidelines On DTI And Student Loans will effectively terminate borrowers being able to use IBR, income-based repayment payment plans on their debt to income ratios for student loans.

Getting A Fully Monthly Amortized Payment By Student Loan Provider

The good news is borrowers can contact the student loan provider and get a fully amortized monthly payment over an extended-term (normally 25 years).

• Tell the student loan provider representative that you are applying for a mortgage and the lender is requesting a fully monthly payment that over the maximum extended term
• This normally comes out to be 050%
• Borrowers can use this figure versus the 1.0% of the student loan balance as the monthly payment to calculate debt to income ratios
• Borrowers do not have to change any term and just need a hypothetical monthly payment that is fully amortized on paper

Loan Programs That Accept Income-Based Repayment

Gustan Cho Associates Mortgage Group accepts Income-Based Repayment (IBR) on conventional loans no matter how large the outstanding student loan balance is. The best solution for homebuyers with higher student loan balances is to try to qualify on conventional loans versus FHA Loans.

Qualifying For FHA Loans With Lender With No Overlays

Not all lenders will honor a hypothetical amortized monthly student loan payment in debt to income ratio calculations. They will just take the 1.0% and use that figure in debt to income ratio calculations. Borrowers with higher student loan balances who need to qualify with a lender with no mortgage lender overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We have no mortgage overlays on FHA, VA, USDA, and Conventional Mortgages. We are also experts on Non-QM Loans and bank statement loans for self-employed borrowers. We are available 7 days a week, evenings, weekends, and holidays.