How do student loans affect my FHA home loan application? Some applicants worry about the amount of student loan debt they carry; after all the lender is required to determine the borrower’s debt-to-income ratio as a means to judge whether the loan is affordable or not.
The debt ratio must be calculated using existing monthly debt, including student loans that are in forbearance. The fact that the loans are not being paid on at application time isn’t as critical as the idea that the loans may become a monthly obligation in the future, affecting the borrower’s ability to pay the mortgage loan.
What do FHA loan rules say about student loans, and those student loans that are in deferment or forbearance?
We use those two terms interchangably here, defined as a student loan that does not currently have applicable monthly payments. Borrowers seeking student loan forgiveness or related issues will need to discuss their current situations with a loan officer to see what is possible.
FHA Loan rules on student loans and how the lender must consider them in the debt ratio are found in HUD 4000.1, the FHA loan handbook. FHA loan rules recognize two different types of financial obligations associated with student loans; the ongoing payment of an existing loan and loans that are considered “deferred obligations” which are deferred or in forbearance.
“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.” Note the exceptions for student loans. For non-student loan related deferred obligations, HUD 4000.1 instructs the lender:
“The Mortgagee must include deferred obligations in the Borrower’s liabilities…The Mortgagee must obtain written documentation of the deferral of the liability from the creditor and evidence of the outstanding balance and terms of the deferred liability. The Mortgagee must obtain evidence of the actual monthly payment obligation, if available.”
Once upon a time, student loan debt was lumped into the deferred obligations category. Now they are given their own separate treatment under FHA loan rules, and where the “actual monthly payment obligation” requirement formerly applied to student loans, now HUD 4000.1 says of them:
“Student Loan refers to liabilities incurred for educational purposes…the Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.” Furthermore, the lender has a specific set of instructions on how to include the loan as part of the borrower’s debt obligations:
“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; or the actual documented payment, provided the payment will fully amortize the loan over its term.”
Student loan debt ratio issues may also be affected by state law, and lender standards. You should discuss your student debt questions with a participating lender to see what is possible or required at the financial institution of your choice.