2021 FHA Loan Guideline Update
As of June 2021, FHA updated its guidelines for student loans in deferment or income-based repayment (IBR). The change will give more borrowers with student loan debt the opportunity to qualify for an FHA loan.
Before the change: We were required to use 1% of the loan balance to determine a borrower’s monthly student loan payment when the loan was deferred or IBR.
Current guideline: If the payment on your credit report reflects $0, we can use 0.5% of the loan balance to calculate your monthly payment.
US student loan debt continues to accelerate like it’s competing for a NASCAR cup series championship. In February 2021, more than 45 million borrowers collectively owe $1.7 trillion in student loan debt. That statistic is hard to fathom, but it’s a reality that creates a barrier to homeownership. Instead of letting that statistic get you down, begin exploring your options.
Several low to no down payment loan programs are available that may make homeownership possible for those fighting the good fight against student loan debt. Since FHA loans are a popular choice for first-time buyers, we’re going to simplify the FHA student loan guidelines to help you decide if this is the right fit for your purchase. Let’s dive in!
FHA Student Loan Guidelines: Types of Student Loan Payments
Student loan payments fall into a few categories: Graduating, fully amortized, income-based repayment, deferred, and forbearance.
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, and they do not cover the principal and interest due. Your loan balance may increase with time even if you are making regular payments. This can be problematic for aspiring homeowners.
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.
FHA Guidelines for IBR and Deferred Student Loans – Updated June 2021
When you buy a home with an FHA loan, a monthly payment must be calculated to determine your total debt-to-income ratio (DTI).
If the payment on your credit report reflects $0, we can use 0.5% of the loan balance to calculate your monthly payment. Prior to June of 2021, this rule required 1% of the loan balance.
When your credit report shows a payment amount higher than $0, we can use the payment amount indicated on the report or the “documented” payment amount.
That means that your loan officer can use the amount that your payment is right now to calculate your payment amount rather than using the amortized payment amount (the payment amount due when the loan is not deferred or in IBR).
If you’re on a repayment plan that allows for a lower payment than what’s shown on your credit report, we may ask for documentation from your student loan servicer to support this FHA student loan debt calculation strategy.
The 2021 change is good news for student debt carriers. Your chances of getting approved for an FHA home loan are higher than ever.
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 that 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 primary residence purchases, the co-signor does not have to live in the home. 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. Keep in mind that all borrowers are responsible for the loan, whether the 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 a 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.
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 uses 5% of the loan balance divided by 12. Check out the VA student loan guideline advantages.
Fannie Mae & Freddie Mac Student Loan Guidelines
Fannie Mae and Freddie Mac conventional loans allow the use of the payments as reported on the credit report. Fannie Mae requires us to use 1% of the loan balance to calculate your monthly payment. Freddie Mac falls in line with current FHA guidelines at 0.5%. You might prefer a conventional loan program if you’re working on an investment property purchase or if you’re trying to avoid paying mortgage insurance. Learn more about Freddie Mac loans and Fannie Mae mortgage benefits.
Therefore, sometimes choosing a home loan doesn’t come down to the lowest rate or payment. It may come down to which home loan treats a buyer’s student loan debt most favorably.
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