Student loan debt continues to accelerate out of control. Just a few months ago, the national student loan debt crossed $1.5 billion and it is rising fast. It is no wonder that many burdened with student loans are finding it hard to save and budget for buying a home. Although, there are home loans which help buyers qualify even though there may be some form of student loan payments. FHA student loan guidelines made big changes in September 2015 which are still felt today.
Old FHA Student Loan Guidelines
FHA case numbers assigned prior to September 14, 2015 had quite the advantage for buyers. Thus, buyers with student loan debt with payments deferred greater than 1 year after the closing date. Because FHA was one of two loan programs which did not require the use of a payment in the debt to income ratio if the student loan was deferred greater than one year after the FHA closing.
This was quite the advantage for these borrowers. Prior to September 2015, there were so many buyers with high levels of deferred student loan debt that called. They were looking to buy a home prior to the change. Otherwise, many of the loans would be denied using traditional rules.
So, obviously we are past 2015. So, what are the current FHA student loan guidelines? Let’s break it down into each category.
Current FHA Student Loan Guidelines
Student loan payments fall into a few categories: Graduating, fully amortized, income based repayment, deferred, and forbearance. More recently, FHA has taken a firmer stance on qualifying FHA borrowers with student loan payments. Many still believe the old guidelines apply. Furthermore, many get the rules of other loan types mixed up with FHA. Trust me, it is easy to do! Loan officers even have to reference the guidelines to keep up with it all.
So, here is how FHA student loan guidelines treat the most popular payment types for qualification purposes.
Income Based Repayment
Income driven or income based repayment, also called IBR, is a low payment alternative to pay back Federal student loans. IBR programs are based on a percentage of the borrower’s income. Although, payments may be as low as $0 per month! Furthermore, after a certain amount of time, it is possible that the balances are forgiven.
When it comes to buying a home, loan programs treat these low payments differently.
In a case where a borrower has IBR or adjusting student loan payments, FHA student loan guidelines require lenders to calculate 1% of the balance listed on the credit report as a payment or the documented payment on the credit report, WHICHEVER IS HIGHER. Another alternative is to use the documented fully amortized payment. “Fully amortized” means using the full principal and interest payment based on the balance, rate, and term of the student loans. An experienced mortgage loan officer will help determine which calculation is most beneficial in each scenario.
Forbearance and Deferred Student Loans
It is very common to see student loans with no payment required at this time. First, it could be in IBR as mentioned above. Another possibility is that the borrower may have a deferment or forbearance. Either is a temporary period with no payments required.
If looking to buy a home with an FHA loan, a payment must be calculated for these debts. The deferment rules expired in 2015. So, these rules are the same as IBR rules. The buyer must qualify using 1% of the deferred student loan balances as a payment or the fully amortized payment.
Obviously, buyers with $100,000 in student loan debt could have a harder time qualifying for an FHA loan. 1% of the balances would mean $1,000 would be figured into the qualifying debt to income ratio. For many buyers, this could cause a problem. But, there are FHA and other solutions available to combat these issues.
FHA Solutions for Buyers With Student Loan Debt
Let’s say FHA student loan guidelines’ conservative way of qualifying buyers with student loan debt doesn’t work. There are other FHA solutions which may put a buyer over the hump. Even if FHA guidelines can’t do it, there may be solutions with other mortgage types.
FHA Debt to Income Ratios
Well, if the student loan payment calculations make the debt ratios higher, FHA may have a solution there. Assuming that the borrower has enough compensating factors, it is possible for loan approval up to a 55% or more debt ratio. That is a significant advantage over USDA or conventional loans. So, it is possible this could save the day on an FHA purchase with student loan debt.
FHA Non Occupying Co Borrower
If the higher debt to income ratio limits just isn’t quite enough, then adding another borrower could do the trick. Basically, a relative may be added as a borrower to the FHA loan. Even though an FHA loan is for a primary residence purchase or refinance, the co signor does not have to live in the property. Normally, the reason for this is to help the occupying borrower qualify better because of a high debt ratio.
In this case, all borrowers’ debts and income are combined into one qualifying entity. It is even possible for the occupying borrower to have no income at all. An example could be a college student. So, this could be an excellent option for buyers with student loan debt. Keep in mind that all borrowers are responsible for the loan, whether main borrower or co signor!
FHA Gift Funds for Down Payment
Carrying student loan debt may also affect down payment funds. Additionally, a buyer just out of college may not have had time to save up a down payment. FHA can come to the rescue in that situation as well! Even though there is a 3.5% of the purchase price down payment, it may be a gift from a relative, nonprofit, or employer. Finally, if buying from a family member, a gift of equity may be used for down payment.
It is even possible for down payment assistance to help in down payment funds. Although, they typically require lower debt to income ratios.
Other Mortgage Loans That Are Favorable Towards Student Loan Debt
FHA is not the only mortgage loan option for buyers with student loan debt. Depending on the situation, there may be even better home loan options. That’s right! VA and conventional loans have advantages in these areas.
VA Loan Student Loan Guidelines
For VA eligible buyers, the old FHA rule on student loan payments deferred over 1 year, still applies. So, VA will not require a qualification payment for any student loan payments deferred over 1 year after closing. For student loans deferred less than one year or having income based repayment, VA has a more favorable calculation than the 1% FHA requirement. Check out the VA loan advantages.
Fannie Mae & Freddie Mac Student Loan Guidelines
Recently, Fannie Mae and Freddie Mac conventional loans have changed in a big way for buyers with income based student loan payments. Both allow the use of the payments as reported on the credit report. Although, in the case where the IBR payment is actually $0 (not in deferment), Fannie will count $0. Freddie will not. But, if there is a $100,000 student loan balance with an IBR payment of $2, both will use $2 in qualifying! Quite the advantage! Learn more about Freddie Mac loans and Fannie Mae mortgage benefits.
Therefore, sometimes choosing a home loan doesn’t come down to lowest rate or payment. It may come down to which home loan treats a buyer’s student loan debt most favorably.