FHA Student Loan Guidelines To Qualify For Mortgage On Home Purchase

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FHA Student Loan Guidelines To Qualify For Mortgage On Home Purchase

This BLOG On FHA Student Loan Guidelines To Qualify For Mortgage On Home Purchase Was Written By Gustan Cho NMLS 873293

what are FHA Student Loan Guidelines To Qualify For Mortgage On Home Purchase

Per FHA Student Loan Guidelines To Qualify For Mortgage, Deferred Student Loans that has been deferred 12 or more months is no longer exempt from debt to income calculations on FHA Loans.

FHA Student Loan Guidelines under HUD 4000.1 FHA Handbook requires the following:

  • 1.0% of the outstanding deferred student loan balance is used as a hypothetical monthly debt and used in borrowers debt to income calculations OR
  • Borrowers can get a monthly fully amortized student loan payment amount by the student loan provider over an extend term which is normally 25 years
  • The fully amortized monthly payment over an extended term turns out to be around 0.5% of the student loan balance
  • The fully amortized monthly payment needs to be in writing by the student loan provider

How Deferred Student Loans Are Calculated In Debt To Income Calculations

How Deferred Student Loans Are Calculated In Debt To Income Calculations

Again, under FHA Student Loan Guidelines, deferred student loans are no longer exempt from DTI Calculations:

  • Even though borrowers have student loans deferred for over 12 months, lenders need to either take 1.0% of the student loan balance
  • Or borrowers can contact their student loan provider and get a written proposed amortized monthly payment over an extended term
  • Not too long ago, borrowers who had student loans that were deferred for longer than 12 months were exempt from taking the student loan into consideration when calculating the borrower’s debt to income ratios
  • Unfortunately, this is no longer the case
  • Deferred student loans are now taken into consideration in the DTI calculations of the FHA Borrower under FHA Student Loan Guidelines

Overlays Versus FHA Student Loan Guidelines

what are Overlays Versus FHA Student Loan Guidelines

Lender Overlays are when a lender has higher FHA Requirements than those of HUD Guidelines.

Here are some examples of overlays a lender may require:

  • To qualify for a 3.5% down payment FHA Mortgage, a borrower needs a credit score of 580
  • Many lenders will not accept any borrowers who have at least a 620 credit score even though HUD only requires a 580 score
  • Lenders need to at least meet the minimum FHA Guidelines
  • However, they can always require higher standards than those implemented and required by HUD
  • This higher standard required by lenders is called a lender overlays
  • It is perfectly legal for lenders not to accept the minimum credit score HUD Requires
  • They can require a higher credit score than the 580 as part of their overlays on credit scores
  • If a lender requires a 620 credit score on their FHA Loan Programs, then the lender has an overlay on credit scores
  • Bottom line is that just because a borrower cannot qualify at one lender, that does not mean that the borrower will not qualify at another lender
  • For example, most banks have overlays on credit scores and requires a 640 credit score when FHA only requires a 580

Lender Overlays On Deferred Student Loans

what are Lender Overlays On Deferred Student Loans

Now since I explained what overlays are, I like to note that there are lenders that have overlays on deferred student loans. Per FHA Student Loan Guidelines, there are two ways of calculating the borrowers monthly obligations when determining debt to income ratios:

  1. A mortgage underwriter can take 1.0% of the student loan balance
  2. Underwriters can use that figure as a monthly debt in the calculation of the student loan
  3. The borrower can contact the student loan provider and get a monthly payment amount that is fully amortized over an extended payment plan which is normally 25 years

Under option #2, the borrower does not need to take their student loan out of deferment. They can just get a printout of the terms and conditions if the deferred student loan were to be out of deferment.

  • Unfortunately, there are lenders that have overlays on this
  • Some lenders will not accept option #2 unless the borrower actually were take their student loans out of deferment
  • So what happens on situations like this is that borrowers need to opt for option #1 where 1.0% of the outstanding student loan balance will be used as the monthly debt of the borrower
  • This can create a problem where the monthly debt will be very high
  • This is the case for those borrowers who have large student loan balances like doctors, lawyers, educators and those with graduate degrees from private colleges and universities

How To Get Monthly Amortized Payment From Student Loan Provider

How To Get Monthly Amortized Payment From Student Loan Provider

Borrowers with large balances on their Deferred Student Loans can have issues when qualifying for a FHA Loan. If we take a loan case scenario where a borrower has $100,000 in deferred student loans and go over this scenario on how to make it work.

Here is how a loan officer should qualify a borrower with deferred student loans:

  • $100,000 deferred student loan balance
  • 1.0% of this will be $1,000 per month under option #1
  • However, getting a proposed amortized monthly payment by the student loan provider will get this figure down to about $500 per month
  • The borrower needs to contact the student loan provider and tell the representative that they are applying for a mortgage
  • The loan officer can be on a three way conference call with the borrower and student loan provider representative
  • The borrower needs a fully amortized monthly payment amount if the deferred student loans were out of deferment over an extended payment plan which is normally 25 years
  • Remember that it needs to be fully amortized
  • Cannot be an income based repayment plan or IBR
  • This figure should be around 0.50% of the outstanding student loan balance which is around $500 on a $100,000 balance student loan amount
  • The loan officer can take the figure that was given over the phone and use that amount as the borrower’s monthly debt when calculating the borrower’s debt to income ratio
  • The lender will need a letter confirming the monthly amortized amount which may take a day or two for the student loan provider to send to the borrower

Conventional Versus FHA Student Loan Guidelines

what are Conventional Versus FHA Student Loan Guidelines

Conventional Loans does accept IBR Payments if it is reported on credit report. Borrowers with high student loan balances can see if they can qualify for Conventional Loans versus FHA Loans and use the IBR payment versus the 1.0% of the student loan balance. With VA Loans, 5% of the student loan balance is taken and divided by 12. That figure is the monthly student loan payment that is used for debt to income ratio calculations. Deferred Student Loans that has been deferred for more than 12 months are exempt from debt to income ratio calculations on VA Home Loans.

Home Buyers who have a large balance on deferred student loans and need a mortgage lender with no overlays to help you, please contact Gustan Cho Associates at 262-878-1965. Home Buyers can text Gustan at 262-716-8151 for faster response or email us with any mortgage inquiries at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates is the national consumer direct division of Loan Cabin Inc. Loan Cabin Inc. is a national five star lender licensed in multiple state with no overlays on all government and Conventional Loans. We have no overlays on FHA debt to income ratios and will go up to 56.9% DTI per the maximum allow under HUD. There are no credit score and DTI requirements on VA Loans. Maximum DTI allowed with Freddie Mac is 50% DTI.

5 Comments
  1. Gustan Cho says

    Deferred Student Loans are exempt on VA LOANS

  2. Queen VLG says

    What about student loans in collection? How do you go about getting a house if your score is 637?

    1. Gustan Cho, NMLS 873293 says

      You need to get studend loans out of collections in order to pay qualfiy for collection loans.

  3. Gloria says

    What if parents are paying my loans? How does that work with FHA?

    1. Gustan Cho, NMLS 873293 says

      If you can provide 12 months canceled checks that your parents are paying for it, you will be fine. It needs to be 12 months canceled checks from their bank account.

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