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Jim Quist is the president and founder of NewCastle Home Loans. He has 20+ years of mortgage lending experience as a business owner, mortgage underwriter, and loan officer. Jim's goal is to help people buy homes.

Jim Quist is the president and founder of NewCastle Home Loans. He has 20+ years of mortgage lending experience as a business owner, mortgage underwriter, and loan officer. Jim's goal is to help people buy homes.



How are student loan payments calculated when qualifying for an FHA loan?


Question:

I have applied for an FHA Loan to buy my first home, and I have several student loans in deferment. The monthly payment on my credit report is $0 but the underwriter said I must use 1% of the balance for each loan as the qualifying payment on my mortgage application. I still qualify for the loan but using the higher payment, but I do not understand why I must use a higher payment than what is reported on my credit report to qualify. Does FHA require that a higher payment must be used or is this just something required by the underwriter on my file?

Answer:

FHA guidelines for calculating the monthly payment on student loans are much more restrictive than conventional loans. FHA does not allow student loans in deferment to be excluded from your debt-to-income ratio. In fact, if the monthly payment on your credit report is less than 1% of the total balance of your student loan, the lender must increase the monthly payment to 1% of the balance and use that to qualify. The only instance when FHA allows for a qualifying monthly payment that is less than 1% of the balance to be used, is if you can provide the original student loan agreement and the fully amortizing payment listed on the agreement is less than 1% of the total balance.

FHA Guidelines:

(H)  Student Loans (TOTAL)

(1)  Definition

Student Loan refers to liabilities incurred for educational purposes.

(2)  Standard

The Mortgagee must include all student loans in the borrower’s liabilities, regardless of the payment type or status of payments.

(3)  Required Documentation

If the payment used for the monthly obligation is:

  • less than 1 percent of the outstanding balance reported on the borrower’s credit report; and
  • less than the monthly payment reported on the borrower’s credit report;

the mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor. 

(4)  Calculation of Monthly Obligation

Regardless of the payment status, the Mortgagee must use either:

the greater of:

  1. 1 percent of the outstanding balance on the loan; or
  2. the monthly payment reported on the borrower’s credit report; or
  3. the actual documented payment, provided the payment will fully amortize the loan over its term.

Real Life Scenario:

Student Loan A

Status on Credit Report: Deferred

Total Balance on Credit Report: $5,000

Monthly Payment on Credit Report: $0

FHA Qualifying Monthly Payment: $50.00 (1% of Balance)

Student Loan B

Status on Credit Report: Income-Based Repayment Plan

Total Balance on Credit Report: $5,000

Monthly Payment on Credit Report: $5.00

FHA Qualifying Monthly Payment: $50.00 (1% of Balance)

Student Loan C

Status on Credit Report: As Agreed (Repayment Terms per Original Student Loan Agreement)

Total Balance on Credit Report: $5,000

Monthly Payment on Credit Report: $40.00

FHA Qualifying Monthly Payment:

  • If the original student loan agreement documentation is provided and the fully amortizing payment matched the monthly payment from the credit report: FHA Qualifying Monthly Payment = $40.00  
  • If the original student loan agreement documentation is not provided: FHA Qualifying Monthly Payment = $50.00 (1% of Balance)   

As a general rule of thumb, assume you will need to use at least 1% of the balance of your student loans as the monthly qualifying payment when applying for an FHA Loan. If you have student loans in deferment or you are on an income-based repayment plan and you need to use the lower payments in order to qualify for a mortgage, talk to your lender about using conventional financing versus FHA financing. Fannie Mae allows you to exclude the monthly payment for student loans in deferment and to qualify using the lower monthly payment agreed to by your student loan provider when you’re in an income-based repayment plan.

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