How Student Loans Affect Your Ability to Get an FHA Loan

Getting an FHA loan can be an attractive option for homebuyers, thanks to its low down payment requirements. However, your student loan debt can impact your ability to qualify. In this comprehensive guide, we’ll cover how FHA treats student loans, recent policy changes, debt-to-income ratio, repayment status, documentation, and more.

FHA loans are backed by the Federal Housing Administration and insured by the FHA This government guarantee allows lenders to offer low down payment loans to buyers who may not qualify for conventional mortgages.

Some key benefits of FHA loans include

• Down payments as low as 3.5% for qualified buyers
• More flexible credit score requirements – typically 580 minimum
• Lower monthly mortgage insurance premiums than conventional loans

Because of these perks, FHA loans open up homeownership possibilities for many people. However, student debt can complicate the ability to qualify.

How Student Loans Impact FHA Loan Eligibility

Your debt-to-income ratio is a key factor lenders evaluate when approving an FHA mortgage. Your DTI compares your total monthly debt payments to your gross monthly income.

FHA typically wants to see your DTI at 43% or lower to qualify Your student loan payment will be included in this calculation The higher your payment, the more it impacts your DTI.

In the past, FHA loans used what was called the “1% rule” to determine the monthly student loan payment for DTI purposes. This meant lenders could use either:

• The actual payment listed on your credit report
• 1% of your total student loan balance

Whichever was greater would be counted toward your DTI. For example, if you had $100,000 in student loans but were on an income-driven plan with a $300 monthly payment, the lender might use $1,000 per month instead for DTI consideration.

This approach could negatively impact borrowers on IDR plans with true payments much lower than 1% of their balance. But recent FHA policy updates provide some relief.

FHA Student Loan Policy Changes in 2021

In June 2021, FHA announced changes to how it treats student loan debt. The new guidance relaxes certain requirements to help borrowers qualify.

Now, lenders will use one of the following to determine your monthly student loan payment for DTI purposes:

• The actual monthly payment listed on your credit report (when above $0)
• 0.5% of your total outstanding student loan balance if your credit report shows $0 monthly payment

Previously, it was 1% of your balance. This 0.5% change can result in a lower payment calculation for DTI than before.

For example, if you have $100,000 in loans but a $0 monthly payment due to an income-driven plan, only $500 would be counted toward your DTI instead of the full $1,000. This could help you qualify for a larger loan amount.

The Impact of Student Loan Repayment Status on FHA Mortgages

Under FHA guidelines, your student loans must be counted toward your DTI no matter what repayment plan or status you’re in. This includes:

• Loans in active repayment
• Deferment or forbearance
• Certain income-driven plans
• Loans currently in COVID forbearance

If you have a $0 monthly payment due to any of the above, the lender will use 0.5% of your total balance for DTI purposes per the new guidance. Otherwise, your actual monthly payment applies.

The 0.5% metric likely overstates your true payment obligation when in non-repayment. But it’s still an improvement from the old 1% policy. Paying down your balance or getting into active repayment could help lower your DTI for mortgage eligibility if needed.

Additionally, you’re ineligible for FHA financing if your federal student loans are in default.

The Significance of Debt-to-Income Ratio in FHA Mortgage Applications

Your DTI gives lenders a snapshot of your current debt obligations compared to income. To qualify for an FHA loan, your back-end DTI needs to be 43% or below. This includes your proposed new mortgage payment.

For example, if your gross monthly income is $5,000 and you have $800 in existing monthly debt payments, you could qualify for a mortgage with up to a $1,200 payment.

$800 existing debt + $1,200 mortgage = $2,000 total/$5,000 income = 40% DTI

The higher your student loan payment used in the DTI calculation, the lower your borrowing potential on an FHA mortgage. Strategies like paying down your balance can help improve your DTI.

Documentation Requirements for Student Loans

When applying for an FHA loan, the lender may ask for documentation to validate your monthly student loan payment amount. This is required if the payment used is less than what’s listed on your credit report.

You’ll need to provide written proof from your student loan servicer showing:

• Current loan balance
• Monthly payment amount
• Repayment status and term

Contact your servicer to request this formal documentation. If your loans are paid off or discharged, your servicer can provide documentation to fully omit them from the DTI calculation.

For example, if you received Public Service Loan Forgiveness, those discharged loans shouldn’t hurt your DTI or eligibility.

How FHA Treats Federal vs. Private Student Loan Debt

FHA considers both federal and private student loans when underwriting mortgage applications. They follow the same guidelines for including your monthly payment in the DTI calculation.

The one difference is regarding loans in default. For federal loans, being in default makes you completely ineligible for FHA financing. This is because the FHA can check the federal government’s Credit Alert Verification Reporting System for defaulted federal loan status.

There’s no similar mechanism to check for private student loan defaults. But having defaulted private loans will still hurt your credit and possibly your DTI calculation through what gets reported to the credit bureaus. Get out of default as soon as possible to avoid issues.

Alternatives to FHA Loans for Student Loan Borrowers

While FHA loans can be great options, also consider:

• Conventional loans – Requires higher down payment and credit scores but no monthly mortgage insurance.

• VA loans – For veterans/military members. No down payment required and more flexible DTI rules.

• USDA loans – For rural properties; 100% financing available.

• Physician loans – Special programs for doctors/medical professionals that offer high financing options.

Explore all your options to find the best mortgage solution. The new FHA student loan guidance removes certain barriers, but you still need to meet general eligibility requirements.

The Bottom Line

Recent FHA student loan policy updates make it easier for borrowers with student debt to qualify for low down payment FHA loans. Lenders now use 0.5% of your total balance instead of 1% for DTI purposes if you have a $0 monthly payment.

Make sure you provide proper documentation and that your DTI aligns with eligibility requirements. Consider paying down balances or getting into active repayment to improve DTI if needed. Meet with a mortgage broker to evaluate all your home financing options.

Frequency of Entities

student loans: 21
fha loans: 16
fha: 16
debt-to-income ratio: 5
monthly payment: 5
loans in default: 3
documentation: 3
repayment status: 3
private student loans: 3
down payment: 3