HUD Guidelines on Student Loans

In this guide, we will cover HUD guidelines on student loans. HUD, the parent of FHA, has lightened up the restrictions on deferred student loans. Student loans can be a deal breaker when getting qualified and approved for a mortgage loan. On June 17th, the US Department of Housing and Urban Development updated its student loan guidelines. The policy updates apply to FHA home loans and change how lenders calculate an applicant’s student loan payment when the loan is deferred.

Currently, lenders qualify applicants with a payment of 0.50% of the outstanding student loan balance even though the actual payment on the student loan documents or credit report is usually lower. The new policy bases the monthly payment on the actual student loan payment. This should help more homebuyers with student debt qualify for an FHA mortgage.

Effective August 16th, 2021, lenders will qualify borrowers with deferred student loans this way. The monthly payment reported on the borrower’s credit report or 0.5% of the outstanding loan balance when the payment is reported as $0. The actual documented monthly payment when the payment is greater than $0.

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The Impact On High Student Loan Balance On FHA Loans

Underwriters include student loan payments in borrowers’ debt-to-income ratios. Even deferred student loan payments. Those with advanced medical or law degrees can have more than $100,000 in student loan balances.

The FHA hopes the new guidelines will assist borrowers who take advantage of the various repayment plans allowing lower payments. Plans that previous underwriting guidelines ignored. The adjustments to the policy should allow many FHA borrowers to borrow more than they could have previously. Most importantly, the new standard should increase the number of qualified borrowers and provide more homeownership opportunities.

Their income is likely to come up quickly while their loans are deferred. By ignoring this fact and adding a high monthly payment to their debt-to-income rations, even though they will have higher income by the time they start repaying these loans, FHA guidelines force these applicants into conventional (non-government) mortgages.

Loophole for FHA Borrowers With High Student Loan Balances

Per new FHA Guidelines Deferred Student Loans, FHA no longer exempts deferred student loans from borrower’s debt to income ratio calculations on student loans that have been deferred for over 12 months.

Those employed but also going to school consistently can normally get an extension on their student loans and get them deferred. Many times borrowers will have their student loan deferment expire in a few months. As long as they are in school, they can request a deferment extension and would normally get it.

Unfortunately, FHA Guidelines Deferred Student Loans stated in HUD 4000.1 FHA Handbook that deferred student loans are no longer exempt from DTI Calculations.

Getting a Lower Hypothetical Monthly Payment

Homebuyers with large student loan balances need to contact their student loan provider and do the following:

Tell them, ” I am applying for a mortgage.”
“My lender needs a fully amortized monthly payment extended term
Normally the maximum term student loan providers can extend to is 25 years
This figure, which can normally be under the 0.50%, can be used deed-in-lieu of the 0.50% of the student loan balance

VA Guidelines for Deferred Student Loans

Unlike FHA loans, VA Home Loans do have an exemption with deferred student loans. Deferred Student Loans deferred for more than 12 months are exempt from debt-to-income calculations for veteran borrowers under VA Guidelines On Deferred Student Loans. If deferred student loans have not been deferred for more than 12 months, a fully amortized monthly payment over an extended term will be used.

HUD guidelines on student loans now allow income-based repayment as long as the payment is at least one dollar. This is a new program where you can exchange the cash. If you have invoices from your trade, that would be better too.

For example, suppose the borrower has a $100,000 outstanding balance on a student loan, and the student loan provider cannot provide a minimum monthly payment invoice. In that case, underwriters will use 1.0% of the $100,000, or $1,000, as the monthly student loan payment in calculating the borrower’s debt-to-income ratios. Or, underwriters will divide 5% of the outstanding student loan balance by 12. The yielding figure is the hypothetical monthly payment used on VA loans.

IBR Payments on Outstanding Student Loans

Fannie Mae and Freddie Mac allow income-based repayment plans on student loans. Borrowers with large outstanding student loan balances should see if they can qualify for conventional loans. Dale Elenteny of FHA Streamline Refinance Lenders explains the importance of HUD guidelines on student loans allowing income-based repayment on FHA loans.

Recently, HUD guidelines on student loans have been modified and updated, allowing income-based repayment. HUD guidelines on student loans make thousands of people eligible for a home loan.

Many Americans could not purchase a home due to the high student loans. Many people are willing to pay their fair share and get taxed so the younger generation can pay off their outstanding student loan debt.