2021 FHA Student Loan Guidelines Help More Qualify for a Mortgage

2021 FHA Student Loan Guideline Update

As of June 2021, FHA updated its student loan guidelines for loans in deferment or income-based repayment (IBR). The change will give more borrowers with student loan debt the opportunity to qualify for an FHA loan. 

Before the change: We were required to use 1% of the loan balance to determine a borrower’s monthly student loan payment when the loan was deferred or IBR.

Now: If the payment on your credit report is $0, we can use 0.5% of the loan balance to calculate your monthly payment. If the payment amount on your credit report is more than $0, we can use the amount shown on the credit report.

The change will help us qualify more FHA home buyers with student debt. Some FHA buyers may also qualify for a home at a higher price point!

Financing a Home with Student Loan Debt

US student loan debt continues to accelerate like it’s competing for a NASCAR cup series championship. In February 2021, more than 45 million borrowers collectively owe $1.7 trillion in student loan debt. That statistic is hard to fathom, but it’s a reality that creates a barrier to homeownership.

Fortunately, FHA loans offer flexibilty for hopeful home buyers with student loan debt. Let’s explore FHA’s student loan guidelines to help you decide if this loan program is right for you! 

Types of Student Loan Payments

Student loan payments fall into a few categories:

• Graduated Repayment
• Fully amortized
• Income-based repayment (IBR)
• Deferred
• Forbearance

If your loan is in IBR or deferred, the FHA student loan update mentioned at the top of this post will come into play.

2021 FHA Guidelines for IBR and Deferred Student Loans

When you buy a home with an FHA loan, your monthly payment must be calculated to determine your total debt-to-income ratio (DTI).

If the payment on your credit report reflects $0, we can use 0.5% of the loan balance to calculate your monthly payment. Prior to June of 2021, this rule required 1% of the loan balance.

When your credit report shows a payment amount higher than $0, we can use the payment amount indicated on the report or the “documented” payment amount.

That means we can use the amount that your payment is right now to calculate your payment amount rather than using the amortized payment amount (the payment amount due when the loan is not deferred or in IBR).

If you’re on a repayment plan that allows for a lower payment than what’s shown on your credit report, we may ask for documentation from your student loan servicer to confirm this status.

The 2021 change is good news for student debt carriers. Your chances of getting approved for an FHA home loan are higher than ever.

FHA Solutions for Buyers With Student Loan Debt

There are other FHA solutions that may put a buyer over the hump:

• Flexible debt-to-income ratio requirements
• A non-occupant co-borrower can help you qualify
• Gift funds can be used to cover home buying expenses

FHA Debt to Income Ratios (DTI)

Assuming that the borrower has enough compensating factors, it is possible for loan approval up to a 55% or more debt ratio. That is a significant advantage over USDA or conventional loans. So, it is possible this could save the day on an FHA purchase with student loan debt.

FHA Non-Occupying Co-Borrower

If the higher DTI limits aren’t quite enough, then adding another borrower could do the trick. A relative of yours may be added as a borrower to the FHA loan. Even though an FHA loan is for primary residence purchases, the co-signor does not have to live in the home.

In this case, all borrowers’ debts and income are combined into one qualifying entity. It is even possible for the occupying borrower to have no income at all. An example could be a college student. Keep in mind that all borrowers are responsible for the loan, whether the main borrower or co-signor.

FHA Gift Funds for Down Payment

Carrying student loan debt may also affect down payment funds. Additionally, a buyer just out of college may not have had time to save up a down payment. FHA can come to the rescue in that situation as well! Even though there is a 3.5% of the purchase price down payment, it may be a gift from a relative, nonprofit, or employer. Finally, if buying from a family member, a gift of equity may be used for a down payment.

It is even possible for down payment assistance to help in down payment funds. Although, they typically require lower debt to income ratios.

Mortgage Loan Options For Buyers with Student Debt

FHA is not the only mortgage loan option for buyers with student loan debt. Depending on the situation, there may be even better home loan options. VA and conventional loans (Freddie Mac and Fannie Mae) also have advantages in these areas.

Therefore, sometimes choosing a home loan doesn’t come down to the lowest rate or payment. It may come down to which home loan treats a buyer’s student loan debt most favorably.