FHA Student Loan Guidelines on FHA Loans
In this blog, we will cover and discuss the FHA student loan guidelines to qualify for FHA loans. Per FHA Student Loan Guidelines for FHA loans. Deferred student loans that have been deferred for 12 or more months are no longer exempt from debt-to-income calculations on FHA loans. FHA Student Loan Guidelines under HUD 4000.1 FHA Handbook requires a percentage of the student loan balance to be used as a hypothetical debt.
What Are FHA Guidelines on Student Loans?
0.50% of the outstanding deferred student loan balance is used as a hypothetical monthly debt and used in the borrower’s debt-to-income calculations. The second option is borrowers can get a monthly fully amortized student loan payment amount from the student loan provider over an extended 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. Click here to apply for FHA loan guidelines on student loans
How Deferred Student Loans Are Calculated In DTI 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.
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
Lender Overlays are when a lender has higher FHA Requirements than those of HUD Guidelines. Most mortgage lenders have overlays on FHA loans. To qualify for a 3.5% down payment FHA Mortgage, a borrower needs a credit score of 580 FICO. Many lenders will not accept any borrowers who have at least a 620 credit score even though HUD only requires a 580 score.
What Are Overlays on Student Loans?
Lenders need to at least meet the minimum HUD 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 overlay. It is perfectly legal for lenders not to accept the minimum credit score HUD requires.
What Are Common Lender Overlays on FHA Loans
They can require a higher credit score than 580 as part of their overlays on credit scores. If a lender requires a 620 credit score on their FHA loan program, 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 require a 640 credit score while FHA only requires a 580.
Lender Overlays On Deferred Student Loans
Now that 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 borrower’s monthly obligations when determining debt-to-income ratios. A mortgage underwriter can take 1.0% of the student loan balance. Underwriters can use that figure as a monthly debt in the calculation of the student loan.
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 of the deferred student loan 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 in 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, and educators, and those with graduate degrees from private colleges and universities. Click here to find a lender overlays on deferred student loans
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 an 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. We will go over how a loan officer should qualify a borrower with deferred student loans. $100,000 deferred student loan balance. 0.50% of this will be $500 per month under option #1.
Getting a Hypothetical Amortized Monthly Payment
However, getting a proposed amortized monthly payment by the student loan provider will get this figure down to about $400 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 0.40% of the outstanding student loan balance which is around $400 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
Conventional and FHA loans both accept IBR Payments if it is reported on the credit report. Borrowers with high student loan balances can see if they can qualify for Conventional and FHA Loans. Borrowers can use the IBR payment versus the 0.50% of the student loan balance.
VA Loan Guidelines on Deferred Student Loans
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 have been deferred for more than 12 months are exempt from debt-to-income ratio calculations on VA Home Loans. Apply for VA loans on deferred student loans
Frequently Asked Questions (FAQs)
- How do student loans impact FHA loan eligibility?
Student loans are included in the debt-to-income ratio, affecting your FHA loan eligibility. The monthly payment amount for student loans is also factored into your overall debt load, influencing how much you can borrow. - How does the FHA calculate student loan payments?
The FHA uses the following methods to calculate student loan payments:
If the loan is in repayment: The payment amount shown on the credit report is utilized.
Suppose the loan is in deferment or forbearance. In that case, 1% of the outstanding loan balance is used unless the actual payment under an income-driven repayment plan is documented and less than 1%. - Can I be eligible for an FHA loan with student loans in deferment?
Yes, you can be eligible for an FHA loan with student loans in deferment. However, the FHA will use 1% of the outstanding loan balance as the monthly payment amount unless you can provide documentation of a lower payment amount under an income-driven repayment plan. - What if my student loan payment is $0 under an income-driven repayment plan?
Suppose your documented payment under an income-driven repayment plan is $0. In that case, the FHA will still consider this in your DTI ratio calculation. You must provide documentation of the income-driven repayment plan to use this $0 payment amount. - How does the FHA handle income-driven repayment plans?
For borrowers on income-driven repayment plans, the FHA allows the actual monthly payment to be used in the DTI calculation, provided proper documentation is submitted. If the payment is $0, it can still be used. - Do FHA student loan guidelines differ from conventional loan guidelines?
Yes, FHA student loan guidelines differ from those of conventional loans. Conventional loans have different criteria for calculating monthly payments, especially for loans in deferment or income-driven repayment plans. - What documentation is required for student loans when applying for an FHA loan?
You will need to provide documentation of your student loan repayment status, such as:
Credit report showing the current payment amount
Statements from the loan servicer
Documentation of income-driven repayment plans, if applicable - Can I refinance my student loans to improve my FHA loan eligibility?
Refinancing your student loans to reduce your monthly fees can improve your DTI ratio, potentially enhancing your eligibility for an FHA loan. However, consider the advantages and disadvantages of refinancing before deciding. - How do I improve my chances of getting an FHA loan when I have high student loan debt?
To improve your chances, consider the following:
Lower your DTI ratio: Pay down other debts to reduce your overall DTI ratio.
Increase your income: Additional income can help offset high student loan payments.
Credit score: Keep a strong credit score by consistently paying all debts on time.
Down payment: Accumulate savings for a bigger down payment to decrease the required loan amount. - Are there any special programs for borrowers with student loans?
While the FHA does not offer special programs specifically for borrowers with student loans, some state and local housing agencies provide assistance programs that assist with down payment and closing fees, making qualifying for an FHA loan easier.
Qualifying For A Mortgage With No Lender Overlays
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 800-900-8569 or text us for a faster response or email us with any mortgage inquiries at alex@gustancho.com.
Best Mortgage Lenders For Bad Credit With No Overlays
We are available 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates is a national five-star lender licensed in multiple states 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 allowed under HUD. There are no credit score and DTI requirements on VA Loans. The maximum DTI allowed with Freddie Mac is 50% DTI. Qualify for a mortgage with no lender overlays
