Student loans, these are the anchors that are weighing down a lot of potential homebuyers. In fact, the numbers are quite staggering as over 40 million people are saddled with student loan debt which is up from about 10 million people in 2008. In less than 8 years, the number of people with student loan debt increased 300% and it is showing no signs of stopping as tuition costs keep increasing at such a rapid rate. Now the problem is how are borrowers going to get approved for FHA loans given this student loan debt on their credit. 2016 FHA Guidelines On Student Loans have changed from previous years. Gone are the days that student loans that were deferred for more than 12 months were exempt from the qualification process. In the past, any student loan that was deferred for at least 12 months, that monthly payment was exempt from debt-to0income (DTI) ratios no matter the total balance. As you can imagine, this was a great option for college graduates to get qualified for homes with large amounts of student loan debt or for the professionals (lawyers, doctors, CPAs) going to school for Master’s and Doctorate degrees. Unfortunately FHA guidelines have fallen in line with Conventional Loans and deferred student loans are now included in the debt-to-income ratio.
In today’s landscape it is the millennials that make up the largest group of potential home buyers but there is one thing holding a lot of them back and that is an ever growing percentage of them are saddled with student loans which will definitely affect their ability to buy their first home. Up until this year, this wouldn’t have been a problem as HUD would not count deferred student loans against their debt-to-income ratios on FHA loans. With these debts being paid back over 10, 20, and 30 years, the millennials are definitely at a disadvantage when trying to purchase a home. From a monetary perspective, you can almost blame the college system for setting America’s youth up for financial failure. It is no secret that a lot of students don’t have parents that are well-off and have college funds for them. Combine this with the ever increasing cost of tuition and the deck seems to be stacked against the college student. In these days, it isn’t even much cheaper to go to in-state schools anymore as a year’s tuition with room and board can exceed $20,000 annually. With student loan debt exceeding $50,000 after graduation, students are under immense pressure to make even more money after graduating college to even have a chance to pay back their loans as well as get approved to purchase a home.
HUD’s 2016 FHA Guidelines On Student Loans is stated on Mortgage Letter 16-08 for all FHA Case Numbers which are assigned on or after June 30, 2016. It is stated that the Mortgagee will need to state and include the borrower’s monthly student loan payments which are shown on the borrower’s credit report, student loan agreement, or the student loan borrower’s payment schedule and the mortgage underwriter will need to include monthly student loan debt payments into the calculations of the borrower’s debt-to-income (DTI) ratios. In the event the mortgage loan borrower’s credit report does not reflect nor show the monthly student loan debt payment, the Lender needs to include the monthly student loan debt payment which is stated in the borrower’s student loan agreement or the student loan payment statement. If the mortgage underwriter will be using the monthly student loan debt payment from the borrower’s credit report in order to calculate debt-to-income ratios, no additional paperwork is needed. In the event the borrower’s credit report does not reflect a monthly student loan debt payment for the student loan, or in the event if the student loan payment debt on the borrower’s credit report is greater than the actual monthly student loan debt obligations, the mortgage lenders will need to get proof of the student loan debt agreement or the student loan debt payment statement which reflects the actual monthly student loan debt payment.
As previously noted, FHA does not require borrowers to satisfy charge off accounts and collections accounts to qualify for an FHA loan. Per the FHA, they allow for medical collection accounts and charge off accounts with an unpaid balance to be exempt from debt-to-income calculations. Also, if there is an unpaid portion of these items, it is not included in debt-to-income ratios. However, non-medical unpaid collection accounts that have a balance of $2,000 or more do require that 5% of the outstanding balance be used in the borrower’s debt-to-income calculations, even if the borrower isn’t making a payment to these accounts. The FHA is also lenient when it comes to treating these outstanding balances in the fact that if the 5% amount will prevent you from qualifying for a loan, you are allowed to negotiate and enter into a payment agreement with the creditor in an effort to lower the monthly debt requirement. As long as the borrower can provide written terms of the payment agreement, this will be used in lieu of the 5% rule.
There is a big exception to collection accounts and unpaid/past-due debt and that is government funded student loans. Any student loan guaranteed by the government cannot be in collections or past-due and if the loan is past-due, the past due amount needs to be current and in good standing for a borrower to qualify under an FHA loan, as well as VA and USDA. This is one area where there is no exception and that if you are behind on government debt, the government is not going to sponsor you on getting another loan so trying to get an FHA loan would be out of the question. If you think about it, this makes sense from the government standpoint. If you can’t pay a current loan, what makes them think they can trust you with a home loan as well.
In conclusion, you can now see how student debt has a large impact on becoming a home owner. Now we can go into details on how the education system is bankrupting America’s youth, but that is a blog for another day. Just keep in mind that any student loan debt that you have that may have been exempt in previous years, is no longer treated this way, so please be informed before going into your next home loan. If you need help with this topic or any other topics, please feel free to visit my website www.loanconsultants.org,call me anytime at 888-900-1020 or email at email@example.com.