FHA revises guidelines for calculating student loans

Tonight HUD announced that they are backing off how they have been treating student loan debts for people who are trying to qualify for a mortgage.

From HUD’s announcement:

“…FHA believes that its approach provides the appropriate balance between expanding access to credit and ensuring that the borrower is able to maintain successful, long-term homeownership.

Consistent with industry practice, the revised guidance allows the same calculation criteria to be applied regardless of the student loan payment plan type (such as income-based payment plans) or deferral status, and also includes:

• A 50 percent reduction in the percentage used to calculate monthly student loan obligations, or the use of the actual documented payment when the payment fully amortizes the loan over its term. This may result in increased purchasing ability for some borrowers, while ensuring borrowers have the long-term ability to meet debt obligations….”

Since last September, FHA had some of the toughest guidelines for student loans. If you wanted to have an FHA mortgage and had student loan(s) and if no payment was available, HUD required that lenders use 2% of the balance as a payment. Fannie and Freddie have only required 1% of the balance to be used. Tonight’s announcement brings FHA mortgages inline with conforming lending of 1%.

Mortgagee Letter 2016-08 basically states:

• All student loans must be factored regardless of payment type or status of payments;
• The greater of 1% of the student loan balance on the loan or the monthly reported payment on the credit report will be used; or
• The actual documented payment, provided the payment will full amortize the loan over its term.

1% or 2% might seem like small figures. However, if you have a student loan in the amount of $24,800 (2015 average according to TICAS for Washington state), factoring a $248 payment is far easier on the debt-to-income ratios than $496.

If you’re considering buying or refinancing a home located anywhere in Washington state, I am happy to help you with your mortgage!