Student loans in deferment or income-based repayment often had an unfair disadvantage when applying for FHA loans. Previously, the FHA used 1% of the loan amount as the student loan payment.
“More often than not, first-time homebuyers are at a disadvantage when it comes to house hunting because of their student loan debt,” says Eric Hall, Mortgage Loan Originator and Corporate Trainer at Atlantic Trust Mortgage. “Because of their income after deferment, some homebuyers might be rejected if their DTI is too high.”
As of this summer, however, the regulations changed, making it much easier for applicants with student loan debt to get approved for home loan financing and it doesn’t require jumping through too many hoops.
The Types of Student Loan Repayments
Currently, graduates may be in either of the following types of repayment:
- Deferment – If you are still in school or applied for forbearance, you may owe nothing currently
- Income-based repayment – If you applied for a payment arrangement, your student loan payment may be based on your current income and can be as low as $0
FHA Loans and the New Regulations
The new FHA regulations opens many possibilities for anyone to achieve the American Dream of owning a home. Here’s what changed.
No longer will the FHA use 1% of the loan amount to qualify student loan borrowers for an FHA loan. Previously, lenders had to use the 1% threshold no matter what the credit report said, but today we can use your actual payment:
- No payment showing on your credit report – We can use 0.5% of the loan balance rather than 1% as previously required. If you have proof of a lower payment from the lender, we can use it to calculate your payment.
- A payment greater than $0 on your credit report – If your credit report shows any payment, as long as it’s higher than $0, we can use it for calculating your DTI.
FHA Loans are Much Easier for Borrowers with Student Debt
The latest FHA regulations opens many doors for student loan borrowers who previously thought they couldn’t qualify for a mortgage because of their student loan debt. Since most borrowers using FHA financing are first-time homebuyers, this can help millions of people achieve their dream of homeownership much earlier in life.
“For potential homebuyers— and especially first-time homebuyers— who have racked up hundreds of thousands of dollars in student debt, this becomes an advantage for them to finally achieve their dream of homeownership without the stress of student loan debt getting in their way,” says Eric. “This guideline change has made it easier for homebuyers to get their foot in the door in such a competitive market!”
What to Do If Your Credit Report Doesn’t Show a Payment
If your credit report doesn’t show a student loan payment amount, contact your loan servicer. Let them know you are applying for an FHA loan and need proof of the fully amortized payment.
Most servicers amortize student loans over 25 years, which is approximately 0.5% of the loan amount, but if your payment is lower, your servicer can prove it. With the new guidelines, this is a common request that student loan borrowers have the right to have fulfilled.
FHA loans have the most flexible guidelines and it just got better with the new student loan debt regulations. If you’re ready to see if you qualify, contact us today! We will walk you through the process and help you get the approval you deserve to achieve your American Dream! If you would like to get in contact with Eric Hall, call 904-386-1767.