A popular topic on the news and in people’s pocketbook is the effect of rising college education expenses on families.  Millennials and often their parents are mounting huge student loan balances.  There is a lot of talks by individual states of making college tuition free for many.  Actually New York just announced free tuition for income levels under $100,000.  We have a long way to go to change the high cost of a college education and solving current debt levels.  Therefore this article discusses current student loan debt’s affect on buying a home.  So student loan debt, even with no payments required, may affect the ability to buy a home.  When it comes to qualification, each mortgage loan type treats deferred or income based repayment (IBR) student loans a little differently.  FHA student loan guidelines changed dramatically on 9/14/15.  Therefore lets mainly discuss FHA student loan guidelines 2017.

FHA Deferred Student Loan Payment Guideline Change 9/14/2015

Prior to September 14, 2015, FHA was the “go to” loan for buyers with deferred student loan debt.  If student loan payments that

are deferred greater than 1 year after closing could be excluded.  Basically lenders would count no monthly payment in the debt ratio calculation.  Obviously, this made FHA qualification much easier when there are deferred payment student loans.  But the rules changed on 9/14/2015.  Ultimately deferred student loan payments of $0 now must include a payment when qualifying a borrower.  This is just another reason to get prequalified to buy a house up-front before making an offer on a house.  Once preapproved, then it is off to look at homes for sale!

FHA Student Loan Guidelines 2017

Deferred student loan payments mean that for a period of time, borrowers are not required to make payments.  Although, borrowers may make payments during this period.  Another popular option for student loan borrowers is called Income Based Repayment or IBR.  Student loan companies like Navient determine a minimum required payment based on the income and debts of the borrower.  There are even ways that a $0 IBR payment is approved.

Income Based Repayment & Deferred Payment Student Loans Guidelines

The HUD / FHA Handbook 4000.1 has the following requirements for student loans in these categories.  Specifically, lenders must include all student loans in the borrower’s liabilities, regardless of payment status.  Usually the amount used in calculating an FHA debt ratio is 1% of the outstanding balances.  But if the payment is under 1% and can be proven to be a fully amortized payment, that may be used.  Here are the actual current FHA student loan guidelines 2017:

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 lender must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor.

Regardless of the payment status, the lender 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.

Mortgage Alternatives with Student Loan Debt

FHA is not the only mortgage option out there.  Although FHA is a wonderful loan program for many reasons, we would want to explore all options available.  VA loans are usually the most flexible when there are either deferred or IBR student loan payments.  VA still allows for using $0 for student loan payments deferred greater than one year.  Plus it has a better way of figuring shorter term deferred payments or IBR payments of $0.  Check out “How to Buy a Home with Student Loan Debt – VA New Policy Can Help!”.   USDA and Fannie Mae conforming loans treat student loan debt similar to FHA.  But Freddie Mac conventional loans, there is an opportunity that helps buyers with IBR payments.  Learn the details of “How to Buy a House with Student Loans in Income Based Repayment“.