FHA Deferred Student Loans Requirement And How It Affects DTI

This Article Is About FHA Deferred Student Loans Requirement And How It Affects DTI

Every mortgage loan program has its own lending guidelines when it comes to student loan guidelines. In this article, we will discuss lending guidelines on the following:

Conventional loans
FHA loans
VA loans
USDA loans
The breaking news on the updated student loan guidelines

Mike Gracz of Gustan Cho Associates has just written an updated article on June 30th, 2021 about the update HUD updated student loan guidelines on FHA loans which will be updated on this article.

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General Student Loan Guidelines to Qualify for Mortgage Loans

Higher education tuition is extremely expensive and it is almost impossible to enroll and attend college these days without student loans. Higher education expenses can surpass $30,000 per year at state colleges and universities.

Private colleges and universities can easily surpass the $50,000 mark annually to attend.

Many college graduates accumulate more than $100,000 or more in student loans by the time they graduate. Oftentimes have their student loans deferred.

Deferred student loans can become a problem for those college graduates who need to qualify for a residential mortgage loan. FHA Deferred Student Loans Requirement has changed where deferred student loans are no longer exempt from DTI Calculations.

Deferred student loans, with the exception of VA Loans, are no longer exempt from DTI Calculations FHA Deferred Student Loans Requirement used to have favorable unlike conventional mortgage lending guidelines but now it is no longer the case.

In this article, we will cover and discuss FHA Deferred Student Loans Requirement And How It Affects DTI.

Conventional Mortgage Lending Guidelines

Deferred student loans on conventional loans have changed for the better. We will discuss the old rules versus the new rules on conventional loans. Fannie Mae and Freddie Mac are the two mortgage giants that regulate conventional mortgage guidelines.

Great news with Conventional Loans is that Income-Based Repayment (IBR) can be used in DTI Calculations as long as it reports on credit bureaus:

If student loans have no monthly payments on the credit report, Fannie Mae and/or Freddie Mac mortgage guidelines want lenders to take 1.0% of the student loan balance and use that number as a monthly debt payment.
This payment is used in DTI Calculations
The old rule to qualify was to take 2% of the student loan aggregate balance amount in calculating the monthly payment
2.0% has now been changed to 1.0%

For example, here is a case scenario:

A borrower who has a $100,000 student loan balance
With the old Fannie Mae Guidelines, 2% of the balance or $2,000 per month was taken as a monthly debt for the underwriter to use to calculate the debt to income ratio
With the new guidelines, only 1.0% can now be used if there is no monthly payment reporting on credit bureaus
Borrowers who make $50,000 and higher student loan balances will have a difficult time qualifying for Conventional Loans if they do not have an IBR payment set up

Borrowers with deferred student loans can make IBR payment arrangements with their student loan providers to qualify for conforming loans.

What Are FHA Deferred Student Loans Requirement

The old FHA Deferred Student Loans Requirement was to exempt student loans that have been deferred more than 12 months from debt to income ratio calculations. This rule has now changed. All deferred student loans, no matter how long they have been deferred, are no longer exempt from DTI.

With the old FHA Guidelines, it used to be in the event of the borrower is still in school, they can get a letter from student loan provider that the student loan is still deferred while they are still in school
The only way student loans that were deferred was counted in DTI calculations was if the student loan was deferred less than 12 months
Then deferred student loans monthly payments are calculated in borrower’s monthly debt to income calculations

FHA and USDA have the same guidelines on deferred student loans.

VA Loans

VA Loans is the only mortgage loan program that exempts deferred student loans in debt to income ratio calculations. Under VA Guidelines On Deferred Student Loans, any student loans that are deferred for more than 12 months are exempt from debt to income ratio calculations.

For non-deferred student loans here is how VA counts student loan payments:

Take 5% of the outstanding student loan balance
Divide it by 12 months
The resulting figure will be the figure used as hypothetical monthly student loan debt

Solutions To High FHA Deferred Student Loans Requirement

Borrowers who have high balance student loans and need to qualify for a mortgage have options.

Gustan Cho Associates has no lender overlays on government and conventional loans
HUD allows higher debt to income ratios than Fannie Mae and/or Freddie Mac
For home buyers with higher DTI, FHA Loans allow up to 46.9% front end and 56.9% back end debt to income ratio to get AUS Approval

FHA Deferred Student Loans Requirement And How To Get Lower DTI

Here is a way where borrowers can qualify for FHA Loans with high student loan balances:

Need to use the following verbiage
Contact student loan provider
Tell them that you are applying for a mortgage
Tell them that the lender is requiring a fully amortized monthly payment on the maximum extended term possible
The extended payment term is normally 25 years
This figure is normally 0.50% of the student loan balance

Following the above instructions should help borrowers with high student loan balances.

Nothing needs to be changed. Borrowers on deferred student loan plans do not have to change them.

The above instructions are just theoretical and all that is needed is a written statement showing a hypothetical case. Underwriters will take this.

Please do not hesitate to contact us at Gustan Cho Associates with any questions in qualifying for a mortgage with high student loan balances at 1-800-900-8569 or text us for a faster response.

Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.

BREAKING NEWS to the above student loan article by Michael Gracz

If you have been following the mortgage blogs from Gustan Cho Associates, you will know that
student loan debt can be a major burden when qualifying for a mortgage loan.

HUD or the U.S. Department of Housing and Urban Development recently announced some important changes
surrounding student loan debt and FHA mortgage lending. In this blog, we will detail the
announcements made on June 17, 2021, in mortgagee letter 2021 – 13.

This is an announcement that will help thousands of Americans across the country purchase a home or now qualify to refinance their property. In this blog, we will discuss the new changes and how to apply for a mortgage loan utilizing these new changes.

It finally seems like the government is understanding there are numerous different ways to pay
back your student loans.

Many different programs include income-based repayment plans, income-driven repayment, deferred payments, fully amortized payment schedules, and tier-based repayment plans.

This is confusing to many individuals. Even those individuals who currently pay their student loans have trouble understanding. The mortgage guidelines are even more confusing when it comes to qualifying monthly payments for debt-to-income purposes. If that wasn’t confusing enough, the student loan guidelines during COVID-19 are even hairier.

As part of the CARES ACT, the United States government put most student loan debt into forbearance with 0% interest. While these loans are in forbearance, payments were not received. This was an issue for individuals attempting to restore their loans from default status.

The non-accepting payments actually hurt some individuals. But for many, this was a lifesaver during the horrible economic times of this pandemic. Many Americans in my generation, generations before me, and generations after me are burdened with student loan debt.

Many individuals have well over $100,000 in student loan debt just to achieve a bachelor’s degree. If you decide to take your education further, you may have multiple hundreds of thousands of dollars in student loan debt.

This is something that you may be paying back for many years to come. Student loans do get in the way of achieving homeownership. Student loan debt is your responsibility, no matter what. Even the bankruptcy courts cannot save you from student loan debt.]

In the past, FHA mortgage lending has only allowed utilizing 1% of your student loan balance as a monthly payment for debt-to-income purposes. Unless your monthly payment on the credit report is higher than 1%, then you must use the higher reported payment.

The only workaround was to be on a fully amortized monthly fixed payment schedule.

The only downside to the fully amortized monthly fixed payment schedule, you would actually need to enter the amortized payment agreement. If you have high student loan debt,

FHA mortgage lending may not be the best option for you. As of now, conventional mortgage lending does allow the use of income-based repayment (IBR) to be used for mortgage qualifications.

Example of FHA Deferred Student Loan Requirement

Example of a 1% student loan payment; if you have $100,000 in total student loan debt, a monthly payment of $1,000 will be used against your overall debt to income ratio.

$1000 against your debt-income ratio is equivalent to multiple car payments, significantly hindering your mortgage qualifications. Many borrowers have well above $100,000 in student loan debt, crippling their qualifications even further.

Calculating FHA Deferred Student Loan Requirement

The new rule for calculating student loan debt on all FHA mortgage lending: Student loan balances, regardless of payment status, will be counted in your debt-to-income qualifications as followed:

The actual payment amount reported to the credit bureaus will be used. IF the credit reports a $0 payment, 0.5% of the outstanding student loan balance will be used as a monthly payment.

NOTE. The lender may exclude a student loan payment from debt-to-income calculations IF they obtain written documentation from the credit that indicates the student loan has been forgiven, canceled, discharged, or paid in full.

Example with new student loan guidelines:

If a borrower has $100,000 in student loan debt, and the credit report shows a $250 monthly payment, then $250 will be counted against your debt-to-income ratio.

If a borrower has $100,000 in student loan debt, and the credit report shows a $0 monthly payment, then 0.5% or $500 will be counted against your debt-to-income ratio.

These changes surrounding student loans are slated to go into effect on all FHA case numbers assigned after August 16, 2021. However, mortgage lenders are allowed to utilize this new rule starting immediately.

This is great news for thousands of Americans!

Applying for a mortgage loan with Gustan Cho Associates is a very streamlined process. With modern-day technology, applying for a mortgage has never been easier. From the comfort of your own home, you will fill out a link on our website. From there a licensed loan officer in your state will contact you.

After your initial phone call, your loan officer will then send you the full mortgage application link. After completing this application link, your loan officer can then verify your credit report and analyze all income and asset documentation provided.

Mortgage lending has a few key pillars of qualification. These pillars are income, assets, and equity. Income must document you have the ability to repay your mortgage loan and other financial obligations. Assets are required for the down payment, closing costs, and sometimes reserves. Equity simply means the down payment or equity position during a refinance.

These three pillars of mortgage lending sound simple but can be incredibly difficult to overcome. Your mortgage application could be the difference between you buying and renting a home.

Even if you feel you may not qualify today, we encourage you to reach out to our team as we work with
many families for well over a year before they qualify for the loan that will suit them best. We are experts in mortgage lending and available to assist you seven days a week.

For any questions surrounding this change to student loans, contact Mike Gracz on 630-659-7644 or mgracz@gustancho.com. We look forward to hearing from you.