The Federal Housing Administration (FHA) recently announced updates to its student loan guidelines, making it easier for borrowers with student loans to get approved for a mortgage loan.
Previously, FHA required mortgage lenders to calculate a homebuyer’s monthly student loan payment as 1% of their outstanding student loan balance for loans that are not fully amortizing or are not in repayment.
Now, lenders may use whatever the actual monthly student loan payment is, even if it’s less than the typical 1% of the total balance.
For example, let’s say a homebuyer has a student loan balance of $8
00,000. They are on an income-based repayment plan that makes their monthly payment just $200 per month. Under FHA’s previous requirements, lenders would have to use the greater of either 1% of the total loan balance ($800 in this case) or the actual monthly payment with the IBR plan when calculating DTI. This could potentially prevent the buyer from qualifying for a mortgage loan. However, with the recent enhancements, the homebuyer can now be qualified using the IBR payment of only $200.
If the monthly payment is $0 due to deferment or forbearance (or even IBR), lenders are now able to use 0.5% of the total loan balance when determining mortgage eligibility – which opens doors for those who may not have been eligible previously.
FHA Loan Benefits
FHA loans offer more flexible guidelines than other conventional loan programs because they’re backed by the government. This makes them perfect for first-time homebuyers, those with a less-than-perfect credit score, and now those with heavy student loan debt.
FHA also offers a renovation loan program which allows homebuyers to take out one loan to cover the cost of the home purchase and any renovations they’d like to do upfront. This is an option many buyers are currently utilizing, as the real estate market is currently in a major seller’s market and housing inventory is limited.
An FHA loan is a government-insured loan subject to certain qualifications and restrictions. FHA provides mortgage insurance on loans made by approved lenders. The cost of mortgage insurance is paid by the homeowner as an up-front amount that is usually financed into the loan amount, as well as an additional amount that is included in the monthly mortgage payment. Subject to credit approval. For reverse mortgages, borrower eligibility requirements apply. Consult a tax advisor for questions about tax and government benefit implications. If you are a servicemember on active duty, prior to seeking a refinance of your existing loan, consult your legal advisor regarding the loss of any benefits you are entitled to under the Servicemembers Civil Relief Act or applicable state law. All loan requests are subject to credit approval as well as specific loan program requirements and guidelines.