How to get approved (Podcast)

How to get approved (Podcast)
Written by Publishing Team

Buying a home with student loans? FHA can help

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

Fortunately, as mortgage consultant Evan Semental explains in a new episode of The Mortgage Reports podcast, it just got a little easier.

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

Check your FHA home eligibility (January 17, 2022)

Listen to Evan on the podcast of Mortgage Reports!

Does FHA Consider Student Loans?

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

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

What are the FHA Student Loan Guidelines?

The updated FHA Student Loan Guidelines are as follows:

  • If you are currently making student loan payments, the payment amount will be calculated on your credit report under your debt-to-income ratio.
  • If you paid less than the amount on your credit report, and you can prove it, FHA will use the lower payment number to qualify.
  • If your loan is deferred or your credit report shows a $0 payment, the FHA will estimate a monthly payment equal to 0.5% of the 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 program.

Check your FHA home eligibility (January 17, 2022)

Old FHA Student Loan Guidelines

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

“Anyone who has tried to get approved for an FHA loan through student loans has been a problem,” Simental said. “It was a problem, and it was very difficult.”

the problem? While Approving a Mortgage, You’ll Ignore FHA actual Student loan installments. Instead, it estimated student loan payments based on the loan balance—which was often significantly greater than the actual repayment.

Let’s say, for example, that you have federal loans, and you’re on an income-based payment plan that only allows you to pay $100 a month because of your income level. If your total balance on your loans is $100,000, the FHA will assume your payments were $1,000 per month — or 1% of your total balance.

This made it difficult for many borrowers to get a loan, as it made their monthly debt payments seem much higher than they actually were (meaning on paper, they didn’t seem to be able to afford that much in order to pay off their monthly mortgage).

“This made it very difficult to try to get FHA loan approved 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 an entirely different approach, allowing lenders to receive the payment already reported on the borrower’s credit report ($100, in the example above) and use it in their debt accounts instead.

If your loan is deferred or your credit report currently shows a zero payment, the FHA will have a 0.5% down payment in place—a significant improvement over the 1% used previously.

“It makes it easier for those who have worked incredibly hard to get an education, get into college, and have endured long nights of school, tough exams, and four, six, or eight years of schooling,” Semental says. “It makes it easier for you to qualify, and it gives you a better chance of qualifying for a loan to buy a home.”

Check your FHA home eligibility (January 17, 2022)

You still need to stay updated on student loan payments

The good news though, student loan borrowers should be aware: CAIVRS — or the Credit Alert Check Reporting System — can still prevent them from getting a mortgage.

CAIVRS shows if a person is in arrears or delinquent on a federal debt — including student loan payments. If they are behind on their federal student loans, they will automatically be disqualified from getting an entire FHA mortgage, no matter how low their monthly payments are.

“If you’re looking to get an FHA loan, you can’t be late. You can’t be late,” Simmental said. “You can’t owe them money because they automatically disqualify you.”

If you are found in CAIVRS and are in arrears in federal debt, you have three options:

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

According to Simmental, loan consolidation can take two to three months, while rehabilitation can take up to 12 months.

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

Check your eligibility for an FHA loan

The goal of the FHA is to make home buying easier for home buyers of any level. The new guidelines for student loans that are more lenient than the FHA’s is another step in the right direction.

If you want to buy a home, but are afraid that student debt will hold you back, it is worth checking your eligibility with an FHA lender.

Check the new price (Jan 17, 2022)

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