How do student loans affect your FHA mortgage? Is it harder to get FHA loan approval if you have student loan debt? What if the debt is not currently due or being paid in monthly installments?
FHA loan rules in HUD 4000.1 (the FHA loan handbook) address these issues. Student loan debt is in a category of its’ own thanks to rule changes a few years ago taking student loans into account during the review for credit worthiness.
Student loans once upon a time were in a category called “deferred obligations” because it was possible to have a student loan debt and not be required to pay at that moment; the amount of the deferred obligation was taken into account in a certain way by the lender. But after the rule changes, student loans and deferred obligations are listed separately in FHA loan rules.
Student loan debt that is not being paid on at the moment is reviewed by the participating FHA lender in a specific way according to HUD 40001. The lender is required to “…include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments”.
But the lender is also required to do the following:
“If the payment used for the monthly obligation is…less than 1 percent of the outstanding balance reported on the Borrower’s credit report; and less than the monthly payment reported on the Borrower’s credit report…the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor.”
The lender is required to use the following formula in order to calculate the borrower’s debt ratio including the student loan, according to HUD 4000.1:
“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 loans are a serious issue for many borrowers and it’s true that some worry about the amount of student loan debt they carry. FHA loan rules do accommodate these concerns, but borrowers need to discuss their situation with student loans with the lender as the requirements of the financial institution also have a say in how the loan may be approved in such cases.
As always, it is best when applying for an FHA mortgage to insure 100% on-time payments for all financial obligations a year ahead of time; 12 months of reliable payments on your credit record (including any applicable student loans which may require payment) is highly encouraged for best results.
Missed or skipped student loan payments in the 12 months up to your FHA mortgage application may seriously hurt your chances for home loan approval.