This BLOG On HUD Guidelines On Student Loans Versus Other Mortgage Programs Was UPDATED And PUBLISHED On December 25th, 2019
The Federal Housing Administration, FHA, has changed the HUD Guidelines On Student Loans.
- HUD, the parent of FHA is excluding deferred student loan payments that have been deferred for more than 12 months from the calculations of debt to income ratios
- HUD’s new FHA 4000.1 Handbook now states lenders cannot discount and exclude deferred student loan payments that have been deferred for more than a year from borrowers debt to income ratios
- This dramatic change on HUD Guidelines On Student Loans has taken effect on September 14, 2015
- HUD will now reduce a home buyer’s buying power the amount a home buyer can qualify for an FHA Loan
- Bottom line is that deferred student loan payments will no longer be treated differently than any other monthly debt payments
- It will be counted towards the borrowers’ debt to income ratio calculations
- It does not matter whether the student loans have been deferred for one to four years
The Federal Housing Administration is now requiring lenders to count the anticipated projected student loan payment into borrower’s debt to income ratios without any exception to this new rule.
Impact On HUD Guidelines On Student Loans
HUD Guidelines On Student Loans will drastically by reducing the amount a home buyer can qualify for an FHA Loan.
Buyers most affected by new HUD Guidelines On Student Loans will be the following types of home buyers:
- college graduates
- graduates of graduate and professional schools
- first time home buyers who recently graduated from technical schools and colleges
- young folks with growing families also known as millennials
Those who have student loans that are deferred will be affected by DTI:
- Borrowers who do not know what their monthly projected payment will be after the deferment period is over, lenders will take 1.0% of the outstanding student loan balance as a monthly debt payment
For example, borrowers with $100,000 student loan balance:
- does not know the projected monthly payment after the deferment period is over
- lenders will take 1.0% of the $100,000 or $1,000 as a hypothetical monthly debt payment
- mortgage underwriters will take the 1% and calculate it towards the calculation of the borrower’s debt to income ratios as a hypothetical debt
Community Property States
Homebuyers who purchase a home in community property states like Wisconsin, New Mexico, Nevada, Washington, Louisiana, Texas, Idaho, Arizona, Alaska, and California and have a non-borrowing spouse with deferred student loans may no longer qualify for an FHA Loan.
- This is since the debt of the non-borrowing spouse is included in the calculation of the debt to income ratios
- Non-borrowing spouses who have not just undergraduate degrees but also either professional degrees such as a master’s degree or law degree, or medical degree, the student loan balance can be extremely high
- Doctors, teachers, and lawyers can have student loan balances of upwards of $200,000 or more
- 1.0% of that balance can exceed $2,000 per month which can be more than the monthly proposed mortgage payment
- The only mortgage loan program that excludes deferred student loan from debt to income ratio calculations are VA Loans
USDA Loans, have the same student loan guidelines as FHA Loans.
Option On Student Loans With FHA
There is an option that can be used with FHA with some lenders BUT NOT all lenders. Some lenders will accept a fully monthly amortized monthly payment over an extended-term (normally 25 years) by the student loan provider. Gustan Cho Associates will take this monthly hypothetical monthly payment over an extended-term which turns out to be 0.5% versus 1.0%.
Here is how it can be done:
- Contact the student loan provider and tell the representative that you are applying for MORTGAGE
- The lender is requesting a monthly fully amortized payment over an extended term
- The longest extended term is normally 25 years
- Tell the student loan provider that the lender is requesting that monthly payment in writing
- It will take 3 to 5 business days to get this statement in writing
There are times when student loan providers will not use the verbiage “amortized.” If this is the case, tell them that a monthly figure is sufficient but the verbiage once that it is paid for 300 months the student loan balance will be paid off in full is acceptable. Most student loan providers will know what is expected by lenders. Borrowers who have a hard time, please contact us at Gustan Cho Associates and either myself or one of our loan officers can do a three-way conference call together with the student loan provider.
VA Guidelines On Student Loans
VA has different mortgage guidelines on student loans. The U.S. Department of Veterans Affairs requires lenders to take 5% of the outstanding student loan balance and divide that figure by 12 months. That figure is used as the hypothetical monthly student loan balance when calculating borrower’s debt to income ratios. VA allows deferred student loans that have been deferred for longer than 12 months. VA does not allow non-occupant co-borrowers. Only married spouses of home buyers can become co-borrowers.
Conforming Guidelines On Student Loans
Conventional Loans is the only mortgage loan program that accepts Income Based Repayments (IBR).
- Borrowers with large outstanding student loan balances but on an IBR payment plan may need to opt with going with conforming loans instead of FHA
- Borrowers can have over $500,000 in outstanding student loans but if their IBR Payments is $50 per month and it reflects on all three credit reports, we can use the $50 IBR Payment versus 1.0% of the outstanding student loan balance
- However, borrowers need to qualify for conventional mortgage guidelines. Gustan Cho Associates has no overlays on government and conforming loans
Borrowers who have a high student loan balance and due to the high balance cannot qualify for an FHA Loan due to high debt to income ratios, the only option will be to have a strong non-occupant co-borrower or qualify for a conventional loan.