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There are many variations on a theme when it comes to one FHA loan question as it relates to a borrower’s debt-to-income ratio when student loans are involved. How does the lender calculate monthly payments for estimated payment to begin when schooling is complete?

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FHA Loan Policy and Student Loan Payments

FHA Loan Policy and Student Loan Payments
February 6, 2017 - There are many variations on a theme when it comes to one FHA loan question as it relates to a borrower’s debt-to-income ratio when student loans are involved. How does the lender calculate monthly payments for estimated payment to begin when schooling is complete?

With student loans, there are two types of payments, one of which may apply depending on the borrower’s status as a full-time student, or as an employee who is not longer attending college. A student loan borrower is either in deferred payment status or is actively paying on her/his student loans. Your lender will need to determine how your debt ratio is affected by the ongoing or deferred loan.

Ongoing payments and deferred payments for student loans have different requirements under FHA loan rules in HUD 4000.1, and additional lender standards may also apply. When your loan officer gets ready to calculate your debt-to-income ratio, there are FHA loan rules in HUD 4000.1 which must be followed for processing student loan debt information.

HUD 4000.1 instructs the lender to use the “actual amount” of the student loan payment or any other deferred obligation wherever possible, but how does the lender proceed in situations where the loan is deferred and the payments don’t start until later?

HUD 4000.1 requires the lender to take the following steps:

“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 anticipated monthly payment obligation, if available.”
As mentioned above, the lender is required to use the actual monthly payment to be paid on any deferred liability, whenever available. “If the actual monthly payment is not available for installment debt, the Mortgagee must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment.”

Note that this is general information for a lender who is reviewing a borrower’s non-student loan deferred obligations. Student loans are handled in a different manner; in the summer of 2016, the FHA issued a mortgagee letter that includes the following instructions to the lender:
“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 Borrowers credit report; or the actual documented payment, provided the payment will fully amortize the loan over its term”.

Lender standards may also apply-check with your loan officer to see what other rules must be satisfied. The amount of time that remains until student loan payments become due and the time that the loan closes could be key when it comes to determining which method (actual or projected payments) the lender can use to establish the amount of a monthly payment on deferred obligations such as a student loan.

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