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Ask the Underwriter: How are student loan payments calculated when qualifying for an FHA loan?

FHA guidelines on student loans are stricter

Ask the Underwriter is a regular column for HousingWire's LendingLife newsletter, addressing real questions asked to, and answered by, professional mortgage underwriter, Dani Hernandez. 

Question from lender:

My borrower has applied for an FHA loan to buy their first home, and they have several student loans in deferment. The monthly payment on their credit report is $0 but the underwriter said we must use 1% of the balance for each loan as the qualifying payment on the mortgage application. Why must they use a higher payment than what is reported on their credit report to qualify? Does FHA require that a higher payment must be used or is this just something required by the underwriter on this file?

Answer:

FHA guidelines for calculating the monthly payment on student loans are much more restrictive than conventional loans. FHA does not allow student loans in deferment to be excluded from your debt-to-income ratio. In fact, if the monthly payment on your credit report is less than 1% of the total balance of your student loan, the lender must increase the monthly payment to 1% of the balance and use that to qualify. The only instance when FHA allows for a qualifying monthly payment that is less than 1% of the balance to be used, is if you can provide the original student loan agreement and the fully amortizing payment listed on the agreement is less than 1% of the total balance.

FHA Guidelines:

(H) Student Loans (TOTAL)
(1) Definition
Student Loan refers to liabilities incurred for educational purposes.

(2) Standard

The Mortgagee must include all student loans in the borrower’s liabilities, regardless of the payment type or status of payments.

(3) Required Documentation

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.

    (4) Calculation of Monthly Obligation

    Regardless of the payment status, the Mortgagee must use either: the greater of:

    1. 1 percent of the outstanding balance on the loan; or
    2. the monthly payment reported on the Borrower’s credit report; or 3. the actual documented payment, provided the payment will fully

    amortize the loan over its term.

    Real Life Scenario:

    Student Loan A
    Status on Credit Report: Deferred
    Total Balance on Credit Report: $5,000
    Monthly Payment on Credit Report: $0
    FHA Qualifying Monthly Payment: $50.00 (1% of Balance)

Student Loan B
Status on Credit Report: Income-Based Repayment Plan Total Balance on Credit Report: $5,000
Monthly Payment on Credit Report: $5.00
FHA Qualifying Monthly Payment: $50.00 (1% of Balance)

Student Loan C
Status on Credit Report: As Agreed (Repayment Terms per Original Student Loan Agreement)

Total Balance on Credit Report: $5,000 Monthly Payment on Credit Report: $40.00 FHA Qualifying Monthly Payment:

  • If the original student loan agreement documentation is provided and the fully amortizing payment matched the monthly payment from the credit report: FHA Qualifying Monthly Payment = $40.00

  • If the original student loan agreement documentation is not provided: FHA Qualifying Monthly Payment = $50.00 (1% of Balance)

    As a general rule of thumb, assume you will need to use at least 1% of the balance of your student loans as the monthly qualifying payment when applying for an FHA Loan. If you have student loans in deferment or you are on an income-based repayment plan and you need to use the lower payments in order to qualify for a mortgage, talk to your lender about using conventional financing versus FHA financing. Fannie Mae allows you to exclude the monthly payment for student loans in deferment and to qualify using the lower monthly payment agreed to by your student loan provider when you’re in an income-based repayment plan.

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