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New FHA Guidance on Student Loans

Congratulations Grad!  Today is your day.  You’re off to great places!  You’re off.. FHA?

With the rising rate of student loan default, FHA will no longer exclude student loan debt from borrower's debt-to-income ratios.  Like Dr. Suess said, " Step with care and great tact and remember that Life’s a Great Balancing Act."

With the rising rate of student loan default, FHA will no longer exclude student loan debt from borrower’s debt-to-income ratios.  So, like Dr. Suess said,  we  will “Step with care and great tact and remember that Life’s a Great Balancing Act.”

“Oh! They Places You’ll Go!” says Dr. Suess. And, if you recall, it’s his enthusiastic affirmation of life’s next chapter mixed with the not-so-gentle warning that “Bang up and Hang ups can happen to you!”

So, it’s quite fitting that in “Life’s Great Balancing Act” the FHA must respond to the issue of rising student loan default rates. Beginning June 15, 2015, the FHA will no longer allow lenders to omit deferred student loans from buyers’ debt-to-income ratios. This means that qualifying for a home loan will become more restrictive for those carrying deferred student loan debt.

“The Waiting Place…for people just waiting.”

Fortunately, you may not have to wait. We still have about two months to use the current FHA programs before the new guidance is mandated.  That said, time is of the essence.  However, if you are planning to purchase outside of this timeline using an FHA program, be sure to have your mortgage review re-worked as soon as possible. That way, if your qualification has changed, you have plenty of time to explore other program options that may still be available.  And, of course, pay down your student loan debt.

The Motivation for FHA’s New Guidance If you aren’t experiencing this yourself, you’ve certainly seen the news.  Student loan default rates are on the rise.  In fact, today’s generation owes more than a trillion dollars in student loans and is defaulting at higher and higher rates. But this is not just a new graduate problem. About 40 million Americans still carry student loans.  That said, how could the FHA not mandate a change?  Especially since the housing market has just been newly rebuilt.  The FHA could continue to add mortgages to the backs of graduates with massive student loan balances might but, wouldn’t that put us all on a “prickly” a perch?  Despite what experts agree, it may be less likely that a homeowner will default on a mortgage before their student loans but, student loan payments will eventually become due.  “And the chances are, then, that [we’ll all] be in a slump.”

Can I still buy a home with Student Loans?

Yes, of course you can still buy a home if you are carrying student loans.  “And will you succeed?  Yes! You will, indeed! (98 and ¾ percent guaranteed.)”  As long as your income can support all of your student loan and other debt obligations.

First and foremost, you must know what your projected payment will be.  For instance, is it 2% or 5% of the outstanding balance?  If you’re unsure, have your loan servicer send you this information in writing.  If you cannot source these terms, your lender will qualify you based on FHA’s new guidelines below:

  • A Deferred Obligations refers to liabilities that have been incurred but where [student loan] payment is deferred or has not yet commenced, including accounts in forbearance.
  • All lenders must include deferred obligations (including student loan debt) in the borrower’s monthly liabilities.
  • Lenders must obtain written documentation of the [student loan] deferral of the liability from the creditor and evidence of the outstanding balance and terms of the deferred liability. The lender must obtain evidence of the anticipated monthly payment obligation, if available.
  • The lender must use the actual monthly payment to be paid on a deferred liability, whenever available.
  • If the actual monthly payment is not available for deferred installment (student loan) debt, the lender must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment.
  • For a student loan, if the actual monthly payment is zero, the lender must utilize 2 percent of the outstanding balance to establish the monthly payment.

Do FHA Home Buyers Have Any Other Options?

The answer is… yes!  But, it can be complicated.  PrimeLending does offer a wide array of home financing options that may work for those with student loans.  Qualification standards may be dissimilar from that of FHA but again, if you’re flexible so, are we!  For instance, we do offer a 97% LTV Conventional loan program.  Like FHA, the 97% LTV program allows for a lesser initial investment and competitive mortgage insurance premiums.  The major difference between the 97% LTV Conventional loan program and FHA’s is credit guidelines.  With the 97% LTV Conventional loan program, student loan calculations are slightly less stringent.

Also, the VA has yet to announce that it will follow FHA’s new guidance regarding student loans. That said, excluding student loan payments from one’s debt-to-income ratio using a VA product is still possible at this time. Of course, to ensure that you are qualified and comfortable with any alternative loan program options that might be more fitting, it is important to meet with your lender to complete a comprehensive review.

For more information on the impact of FHA’s new guidance on student loans or, if you’re interested in a mortgage review, contact me.  Because “Kid, you’ll move mountains!  And, today is your day!  Your mountain is waiting.  So…get on your way!

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Comments:

    • Andrea Massey Says:
    • June 12th, 2015

    I was just reading your article on the new FHA guidance on student loans. Is the same true for VA loans? Also, how does it work with loans with IBR repayment? Do they use the IBR repayment amount if it is more than $0?

    Thanks.

  1. With FHA, Income Based Repayment(IBR) plans must be factored into the debt ratio calculations using the current payment and balance listedon the credit report. If the payment listed on the credit report is $0, then 1.5% of the balance will be used int he calculation.

    The VA does not require student loans be included as part of the debt. However, student loans must not be in forbearance and proof must be provided that payments will not begin within 12 months of closing.