Conventional Versus FHA Guidelines on DTI and Student Loans

This guide compares Conventional versus FHA guidelines on DTI and student loans. Student loan debt can be a major obstacle when qualifying for a home loan. Student loans and car payments are the two largest issues affecting mortgage debt-to-income ratios. HUD, the parent of FHA, used to have extremely lenient FHA guidelines on student loans. Borrowers with deferred student loans for at least 12 months could exclude the potential student loan payments from debt-to-income ratio calculations in the past, but not anymore. The following paragraphs will cover FHA guidelines on DTI and student loans.

HUD Guidelines on Deferred Student Loans

This section will discuss FHA guidelines on DTI and student loans on deferred student loans. Deferred student loans will be counted in the debt-to-income ratio calculations under HUD 4000.1 FHA Handbook, launched on September 14, 2015. Even if the student loans have been deferred for over 12 months, student loan payments will now count on FHA loans. Professionals with graduate or professional degrees, such as doctors, dentists, pharmacists, attorneys, and engineers, can have substantial student loan balances.

Many consumers have student loan balances exceeding north of six figures. Millions of people with student loans with balances over $300,000—some even higher than $500,000. Government-backed student loans cannot be delinquent. Cannot be in collections in qualifying for FHA loans.

HUD does not require borrowers to pay off outstanding collection accounts or charge-off accounts. However, since HUD is a government entity, borrowers cannot be delinquent on government loans or debts owed to the government, such as tax liens, to qualify for FHA loans. HUD is not a mortgage lender. HUD’s function is to insure FHA loans that are originated and funded by mortgage companies that are FHA lenders. HUD guarantees and insures lenders in the event borrowers default on their FHA loans and the lender takes a loss

UPDATED FHA Guidelines on DTI and Student Loan

New FHA guidelines on DTI and student loans affect many home buyers with higher student loan balances. The new FHA guidelines on DTI and student loans are already in effect. FHA loans with large student loan balances in deferment can affect borrowers’ debt-to-income ratios. Mortgage underwriters need to use 0.50% of all deferred student loan balances as a hypothetical debt for debt-to-income ratio calculations. Many lenders have already put these new FHA guidelines on DTI and student loans into effect for quite some time. 

For all FHA loans,  the monthly student loan payments that HUD will require mortgagees to use monthly student loan payments will be the mortgagee will need to use the greater amount of one-half of one percent (-.50%) of the outstanding student loan balance on the student loan.

Or the borrower’s monthly student loan payment that is reported on the borrower’s student loan payment is reflected on the 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 student loan term. HUD now accepts Income-Based Repayment.

Case Scenario of Borrowers With High Student Loan Debt

Let’s take a case study example on FHA guidelines on DTI and student loans. The borrower has a $200,000 student loan balance. The fully amortized student loan payment is $1,000.00. The monthly student loan payment that will be used to qualify is $1,000.00 per month. Let’s take a case scenario of FHA guidelines on DTI and student loans: The borrower has a $200.000 student loan payment. It is an income-based repayment (IBR). Or interest-only student loan payments. Those student loans do not fully amortize the student loan over an extended term. Either the 0.50% of the student loan balance of $200,000 or an IBR will be used, whichever of the lesser amount, as a monthly debt and used in debt-to-income ratio calculations. In this case, 0.50% of the $200,000 is $1,000.00, and the IBR payment is $300.00 monthly. Therefore the $300.00 per month will be used. These new FHA guidelines on DTI And student loans will effectively terminate borrowers’ ability 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 over the maximum extended term. This normally comes out to be at or around 0.50%. If this number is lower, borrowers can use this figure versus the 0.50% of the student loan balance as the monthly payment to calculate debt-to-income ratios. Borrowers do not have to change any term and need a hypothetical monthly payment fully amortized on paper.

FHA Guidelines on DTI and Student Loans: 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 for FHA versus conventional loans.

The maximum debt-to-income ratio cap on FHA loans is 46.9% front-end and 56.9% back-end. Conventional loans do not have a front-end debt-to-income ratio. The back end debt-to-income ratio cap on conventional loans is 50%.

Not all lenders will honor a hypothetical amortized monthly student loan payment in debt-to-income ratio calculations. They will 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 evenings, weekends, and holidays seven days a week.