FHA has recently announced that all deferred student loan payments must be included in the borrower’s debt-to-income (DTI) starting September 14, 2015. FHA was considered the last option available after Fannie Mae and Freddie Mac announced their change to no longer accept deferred student loan payments to be omitted. Student loans in forbearance are also required to be accounted for when qualifying for a home loan.
How does this affect you?
The more debt that is included in your debt-to-income ratio will cause your buying power to be affected because the higher the debt the less they’ll qualify. This does not only affect basic qualifications, but also for first-time homebuyer programs as well. For instance, a student who has acquired $40,000 in student loan debt will see their buying power drop by approximately 30%.
Let’s look at this closer:
If the payments on that $40,000 were 2% of the balance which is conservative, the payment would be $800/mo. If that graduate once qualified for a $350,000 home (with a 3.5% down payment and excluding the deferred payments) this new rule would decrease that amount by approximately 30% or more.
What you need to know about your student loans when applying for a mortgage
In a nutshell, all payments from a student loan must be provided to ensure that they are being accounted for in your debt-to-income. It is imperative that you are able to get a statement or letter from the creditor showing what the terms will be once the payments have commenced; otherwise, a larger payment must be used to calculate your DTI ratio.
The following are excerpts from HUD’s Handbook 4000.1:
Lenders must obtain written documentation of the deferral of the liability from the creditor and evidence of the outstanding balance and terms of the deferred liability. The lender must obtain evidence of the anticipated monthly payment obligation, if available.
The lender must use the actual monthly payment to be paid on a deferred liability, whenever available.
If the actual monthly payment is not available for deferred installment debt, the lender must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment.
For a student loan, if the actual monthly payment is zero, the lender must utilize 2 percent of the outstanding balance to establish the monthly payment.
What if my spouse has student loans, but they are not on the loan?
This is a very common question and a good one at that. In a community property state such as California, all government insured loans such as FHA, VA and USDA require all debts from the borrower’s spouse to be included in their DTI. Which means your spouses’ student loans can possibly cause a loan denial.
If your spouse has student loan debt but you don’t, your other option is to qualify using a Conventional loan with a 3% down payment. All Conventional loans do not require the non-qualifying spouse’s credit to be provided, therefore; her/his debts will not be included in the borrower’s DTI ratio.
What now?
Now that FHA has implemented not only this change, but the lowering of the loan limits, working with a knowledgeable loan officer is important than it has ever been. You need to know your options and strategies that will help you obtain homeownership. The use of non-occupant co-signors such as mom and dad will be more popular going forward.
The Mortgage Credit Certificate (MCC) is also another useful program that can help you get credit to be used as income to offset some of the student loan debt.
To explore your options and to begin your home financing journey with my preferred lender, please feel free to contact me.
June 17, 2015
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