FHA Guidelines On Student Loans And How It Affect DTI

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FHA Guidelines On Student Loans And How It Affect DTI

This BLOG On FHA Guidelines On Student Loans And How It Affect DTI Was UPDATED On October 10th, 2018

FHA Guidelines On Student Loans Explained

Home Buyers with students loans are often facing obstacles when trying to qualify for a FHA insured home loan.

  • FHA Guidelines On Student Loans no longer exempts deferred student loans that has been deferred for more than 12 months
  • In the past, any student loans that has been deferred for at least 12 months, that monthly payment was exempt from debt to income ratio calculations
  • This held true no matter how much the balance of the student loan was
  • This was a great advantage to first time home buyers and college graduates as well as those professionals with advanced degrees such as medical doctors, attorneys, and dentists
  • Unfortunately, deferred student loans are now part of the debt to income ratio calculations for FHA Loans
  • Conventional Loans does allow Income Based Repayment to be used as long as the IBR Payments is good for the next 12 months and reports on credit bureaus

FHA Guidelines On Student Loans And The Effect On Millennials

Millennials make up the largest group of first time home buyers.

  • Unfortunately, most millennials also have large student loans which will affect them when buying their first home
  • This was not a problem when HUD did not count student loan debt on deferred student loan debt in the calculation of the borrower’s debt to income ratios
  • However, deferred student loan debts that has been deferred for 12 or more months is no longer exempt from DTI calculations on FHA Loans
  • College students have two times as much student loan debts today as they did twenty years ago
  • Statistic show that the median student loan debt amount in 2013 was $27,000 where twenty years ago, it was just over $12,000
  • There are many colleges and universities today where tuition and room and board can surpass $50,000 per year
  • Students who graduate with undergraduate degrees and go to graduate and professional schools can easily rack up hundreds of thousands of dollars in student loan debt
  • Student loan debts are long term debts and the borrower may be liable for decades after graduating from colleges and professional schools

A recent study found that a recent college graduate with student loan debts who is a first time home buyer and want to purchase their first home would have to make over 35% more a year, or $9,000 more, than a home buyer who just graduated from college with no student loan debt. This study was conducted by RealtyTrac.

FHA Guidelines On Student Loans And What HUD Say?

HUD’s FHA Guidelines On Student Loans is stated in the Mortgage Letter (ML) 16-08 for FHA Case Number which are assigned on or after June 30, 2016.

  • The Mortgagee will need to state and include the borrowers monthly student loan payments which is shown on the borrower’s credit report, the borrowers student loan agreement
  • Or the student loan borrower’s payment schedule statement and the mortgage underwriter will need to include the monthly student loan debt payments in the calculations of the borrowers debt to income ratios

In the event if borrower’s credit report does not reflect nor show the monthly student loan debt payment, the Lender needs to include the monthly student loan debt payment which is stated in the borrower’s student loan agreement or the student loan payment statement.

If mortgage underwriter will be using the monthly student loan debt payment which is reflected on borrower’s credit report in order to calculate the borrower’s debt to income ratios, no additional paperwork or documentation will be necessary.

In the event if borrower’s credit report does not reflect a monthly student loan debt payment for the student loan, or in the event if the student loan payment debt on the borrower’s credit report is greater than the actual monthly student loan debt obligations by borrower, lenders will need to get proof of the student loan debt agreement or the student loan debt payment statement which reflects the actual monthly student loan debt payment.

DTI FHA Guidelines On Student Loans

Student loan debts that are not in deferment are classified as an installment loan under HUD:

  • The Federal Housing Administration will be counting the actual monthly student loan debt payment of the borrower of the student loan debt
  • Case scenarios of these types will also include the exact month student loan debt payment for the student debt obligation which is being repaid under the IBR
  • Income based repayment plan where in many cases may include an actual monthly student loan debt payment of zero dollars per month
  • HUD does not allow IBR Payments 

Fannie Mae and Freddie Mac allows IBR Payments that reports on all three credit bureaus to be used on Conventional Loans.

FHA Guidelines On Student Loans Past Due Student Loans

HUD does not require to pay off charge off accounts and collection accounts for borrowers to qualify for FHA Loans.

  • FHA allows for medical collection accounts and charge off with outstanding unpaid balances exempt from debt to income calculations
  • No portion of the unpaid balance can be used for DTI Calculations
  • However with non-medical outstanding unpaid collection accounts that total more than $2,000, HUD requires that 5% of the outstanding unpaid collection balance to be used for the borrower’s debt to income calculations
  • This holds true even though the borrower does not have to pay any monthly amount
  • If the 5% of the outstanding collection balance is too much and will disqualify borrower, then HUD will allow borrower to enter into a payment agreement with the collection agency and/or creditor
  • Whatever the payment agreement monthly payment amount is, that amount will be used as a monthly debt payment
  • That amount will be used in the calculations of the borrower’s debt to income ratios
  • There is no seasoning requirement and as long as the borrower can provide the written payment agreement, then borrower can qualify and is ready to go

The exception to collection accounts and past due account is with government student loans. Any student loan debt that is guaranteed by the federal government cannot be in collections and if they are past due, the past due amount needs to be current. It needs to be in good standing for a borrower to qualify for a FHA Loan or any other government loan such as VA Loans and USDA Loans. It does not matter how high the borrowers credit scores are or if all other payments to other creditors are current. The federal government does not want you to have any government backed student loans in arrears and/or in collections in order to qualify for FHA Loans. This also holds true on any other government loan programs.

  1. Daniele says

    My home loan is currently in underwriting. The underwriter had just gotten back to my loan officer and told her that I need to consolidate my student loans to $21800. They are currently at $24080. With a payment not more than $216. I am currently in an IBR plan with my payment being $0 and with interest only payments $106. The credit Bureau has my payment at $289. We are purchasing a home for $164900 with 4% down. I have 2 credit cards with one balance being $1600 and the other being $1800 the credit limit for the cards are $2000 and $4800. I had payed off my auto loan and all other credit cards/loans. I make $3589/month the bank is now saying because of the new guidelines for FHA loans I can only be in a standard repayment plan. But my payment cannot exceed $216. Called Fedloan servicing and my loans will only go 10 years with standard plan and my payment will be $380. Why is FHA screwing 1st time home buyers? I have three obligation 2 credit card and student loans and presumably a mortgage! My credit car payments are $27 and $50 my mortgage was going to be $1200 taxes/insurance/pmi. Does this seem right?

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