This guide will cover the FHA guidelines on student loans on FHA loans. If there is one thing that has been plaguing young adults in the United States is student debt. Recent statistics indicate that over 44 million students and graduates in the country owe an average of $28,000 in student debt, the second-highest consumer debt category, ahead of auto and credit card loans.
It can take years to repay a student loan, especially since you might be out of work or not in the field of study. However, what happens when you want to apply for a home loan? You won’t be able to qualify when you have unpaid student loans.
Millions of people were locked out of the mortgage industry, a problem the government was aware of. So, in June of 2021, the HUD introduced some changes into the mortgage sector, making it easier for borrowers with outstanding student loans to qualify for an FHA mortgage. In this article, we will tell what the guidelines used to be, the new guidelines, and anything else you may want to know about the matter. So, let’s get to it. In the following paragraphs, we will cover FHA guidelines on student loans.
FHA Guidelines on Student Loans Before 2021
FHA guidelines before June 2021. Before the announcement of the FHA update, the lenders were required to use 1% of the total student loan balance owed when dealing with the loan in income-based repayment or deferment.
Any borrower with an average student loan debt of $28,000 had to apply a monthly payment of about $280. And this doesn’t necessarily mean that you would be paying $280 every month for the student loan because you have applied for a loan;
It just assumes that’s the amount you pay every month, and they will include it when calculating your DTI ratio. This affects the amount of loan you can qualify for, limiting the number of homes you can purchase.
FHA Guidelines on Student Loans After 2021
This section will cover the updated FHA guidelines on student loans after June 2021 on FHA loans. According to the new guidelines HUD announced on June 2021, the requirement for the lender to count 1.0% of the total debt balance was removed.
This means that a lot more borrowers will qualify for the loan. If the payment on your credit report is $0, the lenders will use 0.5% of the debt balance. But the payment will be used if you have a payment above $0 on your credit report. So, if your credit report shows a payment of $100, and your loan balance is still $28,000, the lender will use that payment.
And if you have a $0 payment on your report, the lender will use 0.5% of the balance, which means that if the balance is $28,000, then 0.5% will be about $140 per month. Any borrower under the income-based repayment plan will find this change extremely helpful. Also, if a borrower has multiple student loans, the guidelines require the lender to consider the monthly payments of all the loans when calculating the borrower’s DTI. When the student loan is deferred, the lender can use 1% of the outstanding debt balance or the actual monthly payment required once the deferment period ends – whichever is greater. And if the borrower has cleared the student loan, the lender should exclude that loan from the borrower's DTI calculation. But they must provide documentation to prove the loan has been paid in full.
How Mortgage Insurance Affects Debt-To-Income Ratio on FHA Loans
Why does this change matter? Even though this change may seem small, remember that the amount of debt payment you make can affect the amount of loan you qualify for, and that may compromise your investment.
If, for instance, you have an additional $150 that a lender has to include due to your student loan debt, it can reduce your potential mortgage amount by a whopping $50,000 or more. Let’s be honest; this will be a huge difference, especially regarding purchasing power. It can determine where you live and the house you end up buying.
We had mentioned earlier these payments affect your DTI ratio, which tells the lender how much you remain with every month after making all your payments. The higher the debt, the higher the DTI ratio, and the harder it will be for you to qualify for a loan.
The Role of HUD on FHA Loans When Borrowers Default on FHA Loans
What happens when you default on your student loan? When you default on your student loan, that’s a different ballgame! When you default, it significantly affects your credit score, where your score drops by about 50 points, which spells doom on your chances of qualifying for a mortgage shortly.
Before applying for the mortgage, you should take specific steps and bring them current, especially if you are late in making payments or have defaulted. This typically involves contacting your loan servicer or the collection agency and trying to work out a repayment plan or negotiate a settlement.
Once your student loan is no longer in default, in default, you can now apply for an FHA loan. And also, remember to ensure that you have met all the other requirements needed to qualify for an FHA loan. What do these guidelines mean to borrowers?
How Do The UPDATED FHA Guidelines on Student Loans Benefit Borrowers
FHA loans have a one-time 1.75% FHA mortgage insurance premium and a lifetime annual 0.55% FHA mortgage insurance premium for the life of the 30-year fixed-rate mortgage loan.
The 30-basis reduction on the annual FHA mortgage insurance premium from 0.085% to 0.50% is a larger reduction of the monthly housing payment.
With the new guidelines now in effect, how does that benefit you as a borrower? We will tell you it is such good news to modern-day borrowers. In fact, without saying too much, here are some of the benefits of the new FHA guidelines.
Benefits From The UPDATED FHA Guidelines on student Loans Is More Buying Power.
More flexibility in DTI ratios – with the new guidelines, FHA-approved lenders can use the borrower’s actual debt payment when calculating the DTI ratio rather than the percentage of the outstanding balance, which was locking so many people out. This way, borrowers with high student debts and who happen to have a low monthly payment can now easily qualify for an FHA loan.
The updated FHA guidelines on student loans reduce barriers to homeownership. The guidelines did lock out so many borrowers from accessing a mortgage, which meant they were equally locked out of homeownership.
FHA guidelines on student loans allow mortgage lenders to use the borrowers’ actual loan payments or a fraction of the balance, reducing the barriers to homeownership for many borrowers previously denied mortgages due to their existing student loans. Greater access to credit – with more flexibility concerning DTI calculations, many more borrowers can now qualify for an FHA loan, providing greater access to credit to borrowers who would have a tough time applying for a mortgage.
What Is The Bottom Line Impact With The New Updated FHA Guidelines on Student Loans
As we conclude, the new FHA guidelines on student loans are certainly a positive development, especially for borrowers with existing student debts who seek a loan to achieve their dream of homeownership. This is because they provide more options and flexibility to these borrowers, which helps reduce the barriers to homeownership.
The way DTI was calculated, with the previous guidelines, it did lock out many people. But with the new guidelines, where the lenders are required to use the actual payments or a fraction of the percentage used previously – 0.5% – more borrowers may qualify for FHA loans.
If you are a borrower, talk to a mortgage broker or financial adviser who will help you. If you need a mortgage lender licensed in 48 states with no lender overlays on FHA loans, please get in touch with us at FHA Bad Credit Lenders at 262-627-1965. Text us for a faster response. Or email us at gcho@gustancho.com. The FHA Bad Credit Lenders team is experts in helping borrowers with credit scores down to 500 FICO and poor credit on FHA loans.
