The Department of Housing and Urban Development official site has published a press release announcing an important revision to FHA Single-Family home loan guidelines in HUD 4000.1 concerning how a participating FHA lender should consider student loan debt as part of the loan approval process.
Before the publication of HUD 4000.1, the FHA Single-Family Loan program handbook, FHA loan rules “did not address how Mortgagees should calculate future payments of deferred student loan debt which, once due, could negatively impact a Borrower’s long-term ability to repay their Mortgage and other monthly obligations” according to the HUD press release.
What’s more, FHA loan rules did not consider deferred and non-deferred student loan debt separately.
When HUD 4000.1 was published to replace HUD 4155, FHA loan rules were modified to require a participating lender to calculate a monthly payment for deferred student loans “at 2 percent of the outstanding balance and include that payment amount in the Borrower’s Debt-to-Income (DTI) ratio for qualification purposes”.
In 2016, the FHA published Mortgagee Letters and revised HUD 4000.1 to change the payment calculation to either the greater of one 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”.
However, in FHA Mortgagee Letter 2021-13, student loan policies are being changed again.
The HUD press release states, “In recognition of the expanding student loan payment plan alternatives offered by the U.S. Department of Education, including plans with variable amortization schedules based upon Borrower’s income, HUD is adjusting the policy options available for calculating the monthly obligation of student loan liabilities.”
The changes are designed to help borrowers keep access to credit while making sure an FHA loan applicant has the “long-term ability to repay their debt”.
What kind of changes are in the new rules? One section titled, Required Documentation and Calculation of Monthly Obligation of HUD 4000.1 is altered to allow for alternative payment options, and also includes a definition of the term “student loans” to refer to “liabilities incurred for educational purposes”.
Under the new rules the lender is required to include “all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.”
In cases where a student loan payment is less than the monthly payment reported on the applicant’s credit report, the lender, “must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor or student loan servicer.”
Here’s an important aspect of the new rules–the lender is permitted to exclude a payment from the borrower’s debt-to-income ratio, “where written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.”
In cases of outstanding student loans, HUD now directs the lender to use, “the payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero OR 0.5 percent of the outstanding loan balance, when the monthly payment reported on the Borrower’s credit report is zero.”