Last month, the FHA changed its rules for how it deals with student loan deferments and mortgage applications.
But some of that leniency, at least when it comes to student loan debt, changed on September 14, when the FHA tightened its requirements for how mortgage lenders treat deferred student loan debt. In the past, student loan debt that was deferred for more than 12 months before the mortgage closing date wasn’t counted in the debt-to-income ratio. Now, 2% of that debt is included in the calculation, which could raise some borrowers’ debt-to-income ratio above the threshold to qualify for a FHA home loan. In the past, if you had $45,000 in student loan debt deferred, zero of it would be counted as debt. Now 2%, or $900, would be included in the ratio as a payment you owe each month.
“Effectively, the FHA is attempting to promote responsible borrowing by accounting for debt that will ultimately need to be addressed,” says Megan Greuling, a spokeswoman at LendingTree.com. “Once a deferred loan payment is eventually due, a borrower’s income may not support both the FHA home loan and the new student loan payment.”
Nobody is expecting the new rule to prevent the majority of people applying for FHA loans to get rejected. But there are people who have a high amount of student loan debt who may be shut out of the FHA program because of the new rule. After all, according to Edvisors, the average student loan debt a 2015 graduate will have to pay back is slightly more than $35,000 for a bachelor’s degree, $51,000 for a Master’s and $71,000 for a Ph.D. And that’s not to mention the countless people who graduate school with loans in excess of $100,000.
THERE ARE OPTIONS TO DEAL WITH NEW RULE
For mortgage borrowers who have student loans in deferment, there are options. According to mortgage experts, because the FHA is calculating the monthly student loan payment to be 2% of what is in deferment, borrowers who get their loans out of deferment and start paying them back will likely see a lower debt-to-income ratio. That’s because the chances are high that the payment you make each month is actually going to be less than 2% of the loan or loans in deferment. Doing that effectively lowers your debt-to-income ratio, which could be what you need to get approval for a FHA mortgage. Susan Paul of Better Homes and Gardens Real Estate Move Time Realty says borrowers can also get documentation directly from the student loan company for loans in deferment to show the actual payment they will make once the loan comes due.
Another option, says Bill Banfield, a Quicken Loans vice president, is to shop for a smaller or cheaper home, put off the purchase until the borrower has money to put down, reduce some of the student loan debt before purchasing or target other areas to improve the debt-to-income ratio.
Because this rule is for FHA mortgages, borrowers can also apply for non-government backed mortgages as an alternative, says Greuling. While other mortgage loans typically have higher down payment requirements than the 3.5% the FHA loan requires, there are some banks and mortgage lending institutions that will qualify borrowers with low down payments. She pointed to Fannie Mae, which owns a majority of conventional mortgages, and its My Community program for first-time buyers. Borrowers only need a 3 percent down payment. “If you’re a student debt-holding hopeful homebuyer, speak with several different lenders and ask as many questions as needed to get a clear picture. Each scenario is different and loan programs have different requirements,” says Greuling.
Whether borrowers with student loan debt plan to apply for a FHA mortgage or a conventional one, it’s a good idea to understand what their student loan payment will be once it comes out of deferment. Because student loans represent money that people borrow and don’t have to think about for years, it’s easy to forget about it when it comes time to shop for a new home. But if borrowers have a sense of what their student loan payments are going to be, knowing that amount of ahead of time will help for planning and budgeting purposes. After all, the last thing a borrower wants is to end up with a mortgage and a student loan that they can’t make the payments on.