Student Loan Debt Can Affect Your FHA Loan

March 1, 2018

The student loan issue is an important one and many first time home buyers applying for FHA mortgage loans want to know how much of an impact their education debt will have on their ability to borrow.

Your participating FHA lender is required to determine the borrower's debt-to-income ratio as a means to judge whether the loan is affordable or not. Student loans, whether or not they are in deferment status, can affect that debt ratio.

FHA loan rules instruct the lender to calculate the debt ratio based on the borrower’s existing monthly debt. Student loans that are in forbearance don’t get exempted from the ratio; just because your loans are not yet in repayment status at application isn’t as important as the possibility that loans may become a monthly obligation in the future, affecting the borrower's ability to pay the mortgage loan (based on debt ratio calculations).

When discussing the student loan issue, “forbearance” and “deferment” as applied to student loans is interpreted by your lender as a financial obligation which does not currently have applicable monthly payments.

FHA Loan rules on student loans are found in HUD 4000.1, FHA loan rules apply to both the ongoing payment of an existing loan, plus any loans that are considered "deferred obligations" which are deferred or in forbearance. HUD 4000.1 addresses each as follows:

"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."

In past years, a borrower’s student loan debt could be placed among deferred obligations. But at the time of this writing these loans 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 instructs the lender:

"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."

FHA loan rules for student loans may also be supplemented by state law, and lender standards-FHA rules are not the only ones which must be satisfied. Discuss your student debt questions with an FHA lender to see what is possible based on your deferred obligations or existing student loan payments.

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