In this blog, we will cover and discuss HUD student loan guidelines on debt-to-income ratio calculations by mortgage underwriters on FHA loans. Large outstanding student loans can become an issue when qualifying for an FHA loan. HUD student loan guidelines are different than other loan programs. Every mortgage program has its own student loan guidelines on deferred student loans and IBR payments.

What Is DTI?

Your debt-to-income (DTI) ratio measures the percentage of your monthly income that goes toward paying debts. It includes all of your recurring debts, such as credit card payments, car loans, and student loans. The lower your DTI, the easier it may be to qualify for a loan or line of credit.

How Do I Calculate My DTI?

To calculate your DTI, divide your total monthly debts by your gross monthly income. Your gross monthly income is the amount you earn each month before taxes and other deductions are taken out.

For example, let’s say you bring home $3,000 each month after taxes. You also have $600 in monthly debts, which could include car payments, credit card payments, and student loan payments. In this case, your DTI would be 20%: $600 ÷ $3,000 = 0.20

Your DTI is also sometimes expressed as a percentage of your net monthly income instead of your gross monthly income. Your net monthly income is your gross monthly income minus taxes and other deductions. For the example above, let’s say your monthly deductions total $400. This would give you a net monthly income of $2,600:

$3,000 – $400 = $2,600

Using your net monthly income in the calculation would give you a DTI of 23.1%:

$600 ÷ $2,600 = 0.231

HUD Student Loan Guidelines on Deferred Student Loans

Deferred student loans that are deferred for longer than 12 months is no longer exempt from DTI calculations on FHA loans. The only mortgage program that exempts deferred student loans that have been deferred longer than 12 months is VA loans. Income-based repayment (IBR Payments) can now be used on FHA loans.

HUD Student Loan Guidelines on IBR Student Loan Payments

Fannie Mae and Freddie Mac always allowed income-based repayment on conventional loans. This holds true even though the IBR payment is zero dollars per month on conventional loans. HUD has changed its IBR payment policy on student loans and now allows IBR payments on FHA loans.

HUD only allows fully amortized monthly payments on an extended term (normally 25 years) and/or 0.50% of the outstanding student loan balance. There may be times when a fully amortized monthly payment over an extended term can be lower than 0.50% of the outstanding student debt balance.

Fannie Mae/Freddie Mac Versus HUD Student Loan Guidelines

HUD Student Loan Guidelines used to have more restrictions than Fannie/Freddie Agency Guidelines on conventional loans. Both HUD and Fannie Mae and Freddie Mac no longer exempt deferred student loans that have been deferred longer than 12 months from DTI calculations.

Both HUD and Fannie/Freddie require 0.50% of the outstanding student loan balance to be used as a hypothetical monthly debt on student loans in deferment.

FHA Student Loans Guidelines

The Federal Housing Administration (FHA) offers student loans to help borrowers finance their education. FHA student loans have guidelines that must be followed in order to get the loan. Here are some tips on what you need to know about FHA student loans:

• You must be a U.S. citizen or permanent resident in order to qualify for an FHA loan.
• You must have a valid Social Security number.
• You must have a cosigner who is a U.S. citizen or permanent resident with a good credit history in order to qualify for an FHA loan.
• You must be enrolled in an eligible educational program at an accredited school in order to qualify for an FHA loan.
• You must be able to show proof of your ability to repay the loan in order to qualify for an FHA loan.
• You must have a minimum credit score of 580 in order to qualify for an FHA loan.
• You must have a down payment of at least 3.5% of the purchase price in order to qualify for an FHA loan.
• You must have a debt-to-income ratio that is below 43% in order to qualify for an FHA loan.
• You must have a clean credit history without any major derogatory items in order to qualify for an FHA loan.
• You must live in the property that you are purchasing with the FHA loan as your primary residence in order to qualify.

If you are looking for an FHA loan, be sure to follow these guidelines in order to get the loan that you need.

Student Loan Guidelines Follow Fannie/Freddie Income-Based Repayment on Student Loans

Fannie Mae and Freddie Mac always allowed income-based repayment (IBR) to be used by mortgage underwriters when calculating the borrower’s debt-to-income ratio. This holds true even though the IBR payment is zero.  HUD recently changed its guidelines and now allows income-based repayment plans.

HUD allows a hypothetical fully amortized monthly payment over an extended term. The extended term is normally 25 years. Borrowers can request a hypothetical monthly statement over an extended term by contacting their student loan provider.

Using Fully Amortized Monthly Payments Over Extended Terms on Student Loans

When speaking to the student loan provider representative, tell them that you are applying for a mortgage. Tell them that your lender requested a fully amortized monthly payment over an extended term. The mortgage underwriter needs to see this exact verbiage on the written statement by the student loan provider. Most experienced student loan provider representatives will know exactly what you need.

You can have your loan officer on a conference call when you are calling the student loan provider and the loan officer can talk on your behalf with your verbal authorization. The fully amortized hypothetical monthly statement can be used in lieu of 0.50% of the outstanding student loan balance when calculating the borrower’s debt-to-income ratio.

Qualifying For An FHA Loan With Large Outstanding Student Loan Debts

FHA loans are a great mortgage loan program for first-time homebuyers, borrowers with large outstanding collections/charged-off accounts, lower credit scores, and other derogatory credit tradelines. It is easier to get an approve/eligible per automated underwriting system (AUS) with bad credit and a higher debt-to-income ratio than any other loan program.

However, many borrowers have large student loan balances in deferment and/or IBR payments. Fannie Mae and Freddie Mac allow IBR payments to be used in debt-to-income calculations on conventional loans. Now FHA loans allow for IBR payments on student loans. Your loan officer should explore which loan program is best for you in your situation: conventional versus an FHA loan with large outstanding student loans on an IBR payment.

What is a Good DTI Ratio?

The ideal debt-to-income ratio is around 15% or lower. This means that no more than 15% of your income should go toward paying debts each month. However, some lenders may be willing to work with borrowers who have a debt-to-income ratio of up to 43%. A higher DTI ratio may make it more difficult to qualify for a loan or line of credit. It may also mean that you’ll have a higher interest rate and less favorable terms.

How to Lower Your DTI Ratio

If your DTI ratio is too high, there are a few things you can do to try to lower it. You may be able to:

• negotiate with your creditors for lower monthly payments
• consolidate your debts into one loan with a lower interest rate
• make extra payments on your debts each month
• increase your income by finding a better-paying job or working more hours

You may also want to wait to apply for a loan or line of credit until you’ve taken steps to lower your DTI ratio.

Professionals With Large Outstanding Student Loans

Doctors, dentists, lawyers, and teachers are professionals with high outstanding student loans. Many people with advanced and/or professional degrees have outstanding student loans in the six figures. For example, many attorneys who work for a government agency have student loans over $100,000. We have seen some government workers have outstanding student loan balances of higher than $500,000 but make less than $100,000.

How To Qualify For An FHA Loan With a Large Outstanding Student Loan Balance

The following bullet points are how mortgage underwriters calculate student loans into the borrower’s debt-to-income ratio on FHA loans. If the payment used for the monthly obligation is:

• less than 1 percent of the outstanding student balance that is 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 as well as the payment status
• The borrower needs to provide proof, documentation, and evidence of the outstanding balance and terms from the creditor

How Lenders Calculate Student Loan Debt When Qualifying Borrowers

Calculation of Monthly Student Loan Obligation. Regardless of the payment status, the Mortgagee must use either: the less of the following:

• 0.50% percent of the outstanding student loan balance as the monthly hypothetical debt when the mortgage underwriter calculates the borrower’s debt-to-income ratio
• Or obtain a written monthly hypothetical fully amortized payment that is on an extended payment plan (usually 25 years) from the student loan provider
• Proper verbiage stating the monthly payment is fully amortized over 25 years and that after 25 years the student loan outstanding balance will be paid in full needs to be stated and/or clear
• The above-written statement from the student loan provider needs to be provided to the lender

Borrowers with large student loan balances and on an income-based repayment plan should try to go with a conventional loan versus an FHA loan.

Contact Us If You Have Questions about HUD Student Loan Guidelines

HUD Student Loan Guidelines on FHA Loans for Borrowers With High DTI

Qualifying for a mortgage with high student loans is possible depending on the home mortgage program. Every home mortgage program has its own student loan guidelines. Larger student loans is one of the biggest factors affecting borrowers from qualifying for a home mortgage. Average undergraduate tuition, room, and board, and fees at public four-year universities often exceed $40,000 per year.

Tuition at private four-year universities can exceed more than $70,000 per year. Unless your family is extremely wealthy, most college students will need student loans to attend college. It is not uncommon for an average college graduate to have an average of $200,000 in student loans by the time they graduate.

Student loan providers often offer various repayment options such as deferment, income-based repayment, or extensions on deferment until the graduate is settled in.

Entering The Job Market With High Student Loan Debts

The average college graduate made $38,000 in 2022 on their first jobs after college graduation. The monthly payment on a $200,000 student loan balance will not make a dent for the recent graduate in paying the student loan anytime soon. Therefore, most recent college graduates will try to defer making payments on their student loan balance for as long as possible.

Most students with high student loan balances often believe it is next to impossible to qualify for a home mortgage with such a high student loan balance. However, this is not the case. The team at Capital Lending Network, Inc. are experts in helping homebuyers with high student loan balances qualify for a home mortgage after landing their first jobs after graduation.

Qualifying For FHA and USDA Loans With Student Loans

FHA and USDA loans have the same student loan mortgage guidelines. We will cover and discuss FHA and USDA agency mortgage guidelines on FHA and USDA loans. A fixed fully amortized monthly payment over an extended term may be used by mortgage underwriters when calculating the borrower’s debt-to-income ratios. The mortgage underwriter needs written proof with verbiage stating the monthly payments of the student loan is fully amortized and fixed over a certain term (normally 25 years).

Non-fixed monthly payments such as deferred student loans, IBR payments (Income-Based Repayment), Graduated monthly payments, adjusted monthly payments, and/or other types of irregular non-fixed monthly payments cannot be used as monthly hypothetical debts by the mortgage underwriter when calculating the borrowers’ DTI.

FHA and USDA loans require one percent (0.50%) of the outstanding student loan balance to be used as a monthly hypothetical debt and/or the actual monthly payments which are reflected on the borrower’s credit report to be used by the mortgage underwriter. The monthly payment reported on the credit report needs to be fully amortized over an extended term. FHA and USDA loans have changed their student loan guidelines to accept IBR payments like conventional loans.

Fannie Mae allows IBR payments to be used on conventional loans. This includes zero IBR payments. Freddie Mac requires 0.5% of the outstanding student loan balance to be used as a monthly hypothetical monthly debt when calculating the borrower’s debt-to-income ratios. FHA and USDA loans also allow 0.50% of the outstanding student loan balance on deferred student loans.

VA Student Loan Guidelines On VA Home Loans

VA loans are the only home mortgage program that accepts deferred student loans that have been deferred for longer than 12 months. Deferred student loans deferred longer than 12 months are exempt from debt-to-income ratio calculations by mortgage underwriters on VA loans. If the student loans are deferred for less than 12 months, then the following guidelines apply. Taking 5.0% of the outstanding student loan balance and dividing it by 12. The resulting figure is the figure used as the hypothetical monthly debt on VA loans.

FHA Loans Are Best For Borrowers With High Debt To Income Ratios

For homebuyers who have high student loan balances and high debt-to-income ratios, FHA loans are their best option. Remember that income-based repayment (IBR) is allowed on conventional loans and until recently, FHA did not allow them. HUD student loan guidelines now allow IBR payments on FHA loans.

Zero payment IBR payments are allowed on conventional and FHA loans. There are many borrowers who can meet both FHA and Conventional mortgage guidelines. Therefore, if a borrower who has high student loan balances may need to qualify for a conventional versus FHA loan.  FHA loans allow the front debt-to-income ratio at 46.9% front-end and 56.9% back-end.

The debt-to-income ratio cap on conventional loans is 50%. We are experts in helping borrowers with high student loan balances. Homebuyers who need a lender with no lender overlays and need to qualify for a home mortgage with high student loan balances can contact us at Capital Lending Network, Inc. at conact@capitalendingnetwork.com or call us at 888-900-1020. Or text us for a faster response or apply here.