When the lender is adding up an FHA loan applicant’s income and monthly financial obligations for the purpose of calculating debt ratios, there are some debts that can be more complicated than others. Student loans, for example, can be tricky because a borrower may have student loan debt that is in “deferred” status, while others may be paying on their loans at the time of the loan application or soon thereafter.
Here’s a recent reader question on the subject:
“I cannot find anything that talks about NON deferred student loans. I have a client with a $63 payment on their credit report ($25,000 student loan balance). The loan is NOT in deferment, he pays $63 per month. The u/w is telling me I must use the greater of 1% of the balance or the statement that he provided. This makes sense for DEFERRED, but if it not deferred and the credit report shows the monthly, why cant I use that to qualify?”
FHA Mortgagee Letter 2016-08, released in April of 2016, has the following information regarding student loan debt:
“Regardless of the payment status, the Mortgagee must use either:
the greater of:
1 percent of the outstanding balance on the loan; or the monthly payment reported on the Borrower’s credit report:
the actual documented payment, provided the payment will fully amortize the loan over its term”.
As you can see, based on the reading of the above quote from the FHA/HUD official site, the FHA loan requirement according to this April 2016 update of FHA loan rules instructs the lender to use the GREATER amount.
So in cases where the borrower’s actual monthly payment is lower than the amount arrived at when calculating one percent of the outstanding balance on the loan, the lender must use that larger amount to calculate the debt-to-income ratio. Borrowers who have deferred student loans are, under this new rule, actually being given a break compared to other types of deferred obligations where the lender must use five percent instead of one percent to calculate the debt-to-income ratio.
Deferred obligations are defined by the FHA as follows:
“Deferred obligations (excluding Student Loans) refer to liabilities that have been incurred but where payment is deferred or has not yet commenced, including accounts in forbearance.”
For more information on your specific circumstances regarding deferred obligations and/or deferred student loans and how they affect your FHA loan application, speak to a loan officer.