If you’re thinking of buying a house with an FHA-insured mortgage and you have student loans, you might be wondering how this can affect your eligibility.
Don’t worry just yet. You may be able to get approval for your dream home.
In this article, we’ll explore how FHA calculates and considers student loan payments in FHA loan applications and what that means for you and your student debt.
We will also give you tips to help you meet FHA loan requirements, even with your student debt, and avoid a dreaded loan denial.
Ready? So, let’s dive in and demystify the process together!
What the FHA Looks for
The Federal Housing Administration (FHA) loan is a popular and attractive loan option to many borrowers for a reason. It offers favorable down payment requirements and flexible credit requirements, even for those with student debts.
The FHA considers student loan payments in two different ways.
First, they will look at the total amount that you owe on your student loans relative to your income and debt-to-income ratio.
If you have a high debt-to-income ratio, you may be required to make larger monthly FHA loan payments or provide additional collateral in order to qualify for an FHA loan.
Second, the FHA will look at your payment history on your student loans; late payments or defaulted loans could impact your ability to secure an FHA loan.
But with proof of consistent and timely payments, you can demonstrate your financial responsibility and increase your chances of being approved for an FHA loan.
How to Calculate Student Loan Payments for FHA
Understanding how lenders will calculate your student debt when considering your eligibility for an FHA loan is important.
The FHA guidelines allow lenders to use one of the following to determine a borrower’s student loan payments when calculating their DTI:
- The monthly student loan payment reported on the borrower’s credit report
- The actual payment amount for the student loan
- 0.5% of the loan balance if the current payment status is zero
You can use the most appropriate figure to determine your DTI and then use our mortgage calculator to determine your monthly mortgage payments based on different down payment amounts, loan terms, and interest rates.
These calculations can help you determine how much FHA loan you are likely to qualify for and get approved for.
Does FHA Allow Income-Based Repayment for Student Loans?
The Federal Housing Administration (FHA) allows you to include income-based repayment plans when calculating your debt-to-income ratio. In fact, the FHA has specific guidelines for how lenders should handle borrowers who have student loans on an IBR plan.
Under these guidelines, if a borrower is on an IBR plan, the lender must use the actual monthly payment reported on the borrower’s credit report as long as it’s greater than zero.
However, if the credit report doesn’t show a monthly payment amount, the lender must use either the actual payment the borrower is making, or 0.5% of the total outstanding student loan balance, whichever is higher.
This means that you can qualify for an FHA mortgage with student loan debt even if you’re paying off your student debt through an income-driven repayment plan.
By basing the payment on your income and family size, lenders have greater assurance that you can meet the payment amount without putting you in financial hardship. This helps ensure that you can stay current on your monthly mortgage payments.
Note that these guidelines only apply to student loans that are in repayment. If a borrower’s loans are in deferment or forbearance, the FHA has different guidelines for calculating the monthly payment amount.
Can I Get an FHA Loan With Defaulted Student Loans?
Yes, with the right tools and knowledge, you can get an FHA loan even if you have defaulted on student loans.
A borrower with defaulted student loans must still prove they are able to make regular mortgage payments. Here are two options.
- You may enter into a student loan rehabilitation program. With nine consecutive, on-time monthly payments, your default status may be removed, which further will improve your credit score.
- Or, you can make a lump sum payment or agree to a repayment plan with the collection agency to bring the loans out of default. Once you make the necessary payments, you may be able to qualify for an FHA loan.
FHA lenders may require additional documentation from borrowers with defaulted student loans. This might include proof of income or liquid assets that could help cover any potential late payments on the mortgage.
Additionally, it’s also possible that a higher down payment may be required if you have defaulted on student loans on your credit report.
Are There Restrictions to the Amount of Student Loan Debt You Can Have?
The FHA has no specific limit on the amount of student loan debt that a borrower can have and still be eligible for an FHA loan.
However, lenders may have their own requirements and restrictions when it comes to student loan debt. This includes your total debt-to-income (DTI) ratio when determining eligibility for an FHA loan.
The DTI ratio compares your total monthly debt payments to your gross monthly income.
In any case, it’s important to work with an FHA-approved lender, or if you plan to get a home in any of these areas, work with us to help you navigate the specific guidelines and requirements of the FHA when it comes to calculating student loan payments.
How to Improve Your Chances Of Getting Approved
Improving your chances of getting approved for an FHA loan is a matter of preparation and understanding.
Here are some tips to get you started.
- Pay off debt – Start by paying down any existing debt, including student loans, and build up your savings account. This will give you a healthier DTI and increase lenders’ confidence in you repaying your FHA loan.
- Improve credit score – Establishing a healthy credit score is also key, so make your student loan payments on time and ensure that you don’t exceed 30% utilization on revolving credit lines.
- No new debt – If possible, delay taking any additional student loans until after you’ve received approval on your mortgage application.
- No large purchases – Take care to avoid any large purchases in the months leading up to applying for an FHA loan; lenders may view this as a sign of instability or financial risk.
- Understand requirements – There are a variety of FHA loans, each with slightly different requirements. The requirements for a 203k loan may differ slightly from the requirements of an FHA loan refinance. Take time to understand the requirements of the FHA loan you want, and how your student loan will affect your eligibility for that loan.
Remember that when applying for an FHA loan, it’s essential to present yourself as a responsible borrower with good credit and stable finances. So, with proper preparation and research, you can give yourself the best chance of being approved.
Should I Apply for an FHA Loan With Student Loan Debt?
Yes, you may. But before you dive in headfirst, it’s important to understand how your student loan payments could impact your ability to qualify for an FHA loan.
Do your research and explore options like income-based repayment plans, to improve your chances of getting approved for an FHA loan.
Also, give us a call to help you determine your best line of action given your unique financial situation. We’re here to help you navigate your unique financial situation and find the best loan options and solutions for your needs.
