How the FHA Calculates Student Loan Payments for Mortgage Eligibility

Taking on a mortgage is a big financial commitment. To ensure borrowers can handle the obligation, lenders like the Federal Housing Administration (FHA) carefully analyze debt obligations, including student loans. In the past, FHA guidelines required calculating student loan payments as a percentage of the total balance. But in 2021, FHA updated its rules to align better with how payments are determined in the student loan industry.

Background on FHA Student Loan Rules

The FHA insures mortgages issued by approved lenders, making homeownership more accessible. FHA loans allow higher debt-to-income ratios and lower down payments than conventional mortgages. However, the FHA still wants to limit risk by ensuring borrowers can manage their debts.

Student loans are a large debt obligation for many. Previously, FHA rules required lenders calculate student loan payments as 1% of the total outstanding balance, even if the actual monthly payment was lower. This inflated the debt burden in the debt-to-income ratio analysis, making approval harder.

The Recent Changes to FHA Policy

In June 2021, the FHA introduced a new student loan payment calculation giving lenders more flexibility:

• For loans with payments above $0, use the actual monthly payment from documentation or the borrower’s credit report.

• For loans with $0 payments due to deferment/forbearance, calculate the payment as 0.5% of the total balance.

• Exclude loans documented as forgiven, canceled, discharged or paid in full.

Previously, deferred loans were calculated at 1% of the balance. Now 0.5% is used, cutting the payment amount in half.

Why the Policy Changed

The old 1% rule didn’t align with actual payments and made approval harder for responsible borrowers managing their student loans, The new policy accounts for deferments/forbearances and allows actual student loan documentation to determine the payment

The FHA wants to balance access to credit with ensuring loans are repaid. More accurate payment calculations using verified documentation improves underwriting accuracy. Borrowers with reasonable student loan payments can now more easily qualify.

How Student Loans Impact Debt-to-Income Ratio

Your total monthly debt payments divided by gross monthly income gives your debt-to-income ratio. Typically, the FHA wants ratios below 43%. Student loans are included in total debt obligations, so reducing the calculated payment by using documented amounts improves DTI.

Previously, a $300,000 balance with a $400 actual payment added $3000 (1% of balance) to the DTI Now, the $400 documented payment is used

Tips for Managing Student Loans When Buying a Home

While it’s now easier to qualify for an FHA loan with student debt, it still helps to minimize the impact to your DTI. Here are some tips:

• Make payments on time and avoid deferments to keep balances low.
• Pay down balances before applying to reduce the 0.5% calculation amount.
• Provide documentation to use your actual monthly payment amount rather than 0.5%.
• Enroll in income-based repayment plans to potentially lower monthly payments.
• Consider getting a cosigner to offset debt with their income.
• Ask lenders about alternative loan types like physician and dental loans.

The recent FHA change is a win for responsible student loan borrowers. Accurately factoring in real payments expands mortgage eligibility. But you can still take proactive steps to reduce the impact of student debt obligations when applying for an FHA or conventional mortgage.

The Bottom Line

The FHA’s new guidance provides more options to calculate manageable student loan payments when determining borrower eligibility. This flexibility better aligns with repayment realities and makes homeownership more feasible for student loan borrowers. Review your specific situation to see if you may now qualify for an FHA mortgage under the updated payment percentage rules.