Buying a house with student loans? FHA can help

It can be challenging to get a mortgage with student loan debt to your name. 

Fortunately, as mortgage advisor Ivan Simental explains in a new episode of The Mortgage Reports podcast, it just got a little bit easier.

That’s because the Federal Housing Administration announced a new approach to calculating student loan debt. The move makes it easier for student loan borrowers to not only qualify for FHA mortgage loans, but to potentially qualify for larger loan amounts too. 

Listen to Ivan on The Mortgage Reports Podcast!

Does FHA look at student loans?

Yes. If you have student debt, your mortgage lender will take that into account when determining your eligibility for an FHA loan. Your student debt impacts your debt-to-income ratio (DTI), which in turn impacts how large of a home loan you can qualify for.

Thanks to new rules, though, qualifying for an FHA mortgage with student loan debt on the books is now much easier.

What are FHA’s student loan guidelines?

The updated FHA student loan guidelines are as follows:

• If you’re currently making student loan payments, the payment amount on your credit report will be counted toward your debt-to-income ratio
• If you pay less than the amount on your credit report, and you can prove it, FHA will use the lower payment number for qualification 
• If your loan is in deferment or your credit report shows a $0 payment, FHA will estimate a monthly payment equal to 0.5% of your outstanding student loan balance

Thanks to these new rules, borrowers with high levels of student loan debt should have an easier time qualifying for the FHA loan program.

The old FHA student loan guidelines

According to Simental, FHA’s new student loan guidelines are now “much better” — and a major improvement over previous policies, which made it quite difficult for student loan borrowers to get an FHA mortgage. 

“Anybody who has ever tried to get approved for an FHA loan with student loans, it’s been a headache,” Simental said. “It’s been a hassle, and it’s been very, very difficult.”

The problem? During mortgage approval, FHA would ignore your student loan payments. Instead, it estimated student loan payment based on the loan balance — which was often much larger than the real payment.

So say, for example, you have federal loans, and you’re on an income-based repayment plan that allows you to pay just $100 per month due to your income level. If your total balance on your loans is $100,000, FHA would actually assume your payments were $1,000 a month — or 1% of your total balance.

This made it challenging for many borrowers to get a loan, as it made their monthly debt payments seem significantly higher than they actually were (meaning on paper, it didn’t look like they could afford very much toward a monthly mortgage payment.)

“That made it incredibly difficult to try to get approved for an FHA loan with a lot of student loan debt — or even minimal student loan debt, like $30, $40, or $50,000.”

How FHA student loan guidelines are changing

The new rule takes a whole different approach, allowing lenders to take the payment actually reported on a borrower’s credit report ($100, in the example above) and use that in their debt calculations instead. 

If your loan is in deferment or your credit report currently shows a payment of zero, then FHA will assume a 0.5% payment in its place — a big improvement over the 1% used previously. 

“It makes it easier for those of you that have worked so incredibly hard to get an education, get through college, endured long nights of studying, hard tests, and four, six, or eight years of school,” Simental says. “It makes it easier for you to qualify, and it gives you have a better chance for you to qualify for a home loan.”

You still need to stay current on student loan payments

Despite the good news, student loan borrowers should be aware: CAIVRS — or the Credit Alert Verification Reporting System — could still hold them back from getting a mortgage.

CAIVRS shows if a person is late or in default on a federal debt — including student loan payments. If they are and have had late payments on their federal student loans, they’ll be automatically disqualified from getting an FHA mortgage entirely, no matter how low their monthly payments may be.

“If you are looking to get an FHA loan, you cannot be delinquent. You cannot be late,” Simental said. “You cannot owe money to them because it automatically disqualifies you.”

If you are found in CAIVRS and are behind on a federal debt, you have three options:

• Negotiate a settlement with your loan servicer
• Apply for loan consolidation
• Enter a loan rehabilitation program

According to Simental, loan consolidation can take anywhere from two to three months, while rehabilitation can take as long as 12 months. 

To learn more about qualifying for an FHA loan or other type of mortgage while carrying student loan debt, reach out to a mortgage advisor in your area.

Check your FHA loan eligibility

The FHA’s goal is to make home buying more accessible for home buyers at any level. And the new, more lenient FHA student loan guidelines are one more step in the right direction.

If you want to buy a home, but were afraid student debt would hold you back, it’s worth checking your eligibility with an FHA lender.

Verify your new rate (Dec 6th, 2021)