If you have read my previous article on student loan debt and housing approval, you will know that this can possibly derail your home ownership potential. Up until recently, FHA Guidelines on Student Loans had been extremely lenient, now it is not the case. In the past if you had deferred loans for at least 12 months prior to applying for a loan, the student loan debt was not calculated in your DTI (debt-to-income) ratio. However, when HUD 4000.1 FHA Handbook came out in September of 2015, the entire scenario changed. Now on the 2022 FHA Guidelines Student Loans, all of the deferred student loan debt that you currently have will be factored into and counted for your debt-to-income ratio on FHA loans. Even if your loans have been deferred for more than 12 months, it doesn’t matter with the new rules that were released.
In the case of professionals, doctors, dentists, attorneys, engineers, etc, who have spent a lot of time in college and have amassed a lot of student loan debt along the way will surely not like the 2022 FHA Guidelines Student Loans. These rules make obtaining a home a whole lot harder after their studies have been completed. In a lot of cases, these professionals have over $100,000 of student loan debt, and even as high as $500,000 depending on the school they obtained their education from. If the borrower in question also has government backed student loans, 2022 FHA Guidelines Student Loans states that these loans cannot be delinquent or in collections if trying to get an FHA loan.
The brand new 2016 FHA Guidelines Student Loans are set to go into effect for loan files created after June 30, 2022 . In advance of these guidelines going live, a lot of lenders are already enforcing these guidelines since it is inevitable they are happening. If the case is created prior to June 30, large student loan balances shouldn’t bother FHA borrowers, but this may not be the case 100% of the time. Since these lenders can have their own lender overlays, you can see them enforcing these guidelines prior to them coming out formally.
After June 30, 2022 the new guidelines will be calculated in the following way: the mortgagee will need to use the greater of 1% of the outstanding student loan debt or the borrower’s monthly student loan debt payment that is reflected on the credit report. Let’s take an example of how this will be calculated and come into play in the coming months. If a borrower has $100,000 student loan debt and the fully amortized payment is $750, this is the amount that will be used in the debt-to-income ratio. However, if the borrower is on an income based repayment plan or interest only plan that isn’t amortized, the amount will be 1% of the loan amount or $1,000 in their debt-to-income ratio. These new 2022 FHA Guidelines Student Loans will essentially eliminate FHA loan applicants from having income based repayment plans for home ownership. All debt will most likely need to be fully amortized with a reported monthly payment.
2022 FHS DTI Ratio Guidelines (debt-to-income) is one of, if not the most important factors when determining if you qualify for a FHA loan. What is debt-to-income ratio you might be asking. Well the DTI ratio is the sum of all monthly minimum monthly payments which includes prinicipal, interest, taxes, and insurance (PITI) of the new property divided by the borrower’s monthly gross income. Depending on the mortgage program you are looking to get qualified for, the DTI ratios might differ. For the 2022 FHA DTI Ratio Guidelines borrowers are capped at 46.9% DTI front-end and 56.9% DTI back-end and this is only if you have a 620+ FICO score. However, if your FICO is under 620, 2022 FHA DTI Ratio Guidelines significantly reduce the DTI Ratio to 43% DTI in total. Having a poor credit score definitely has some ramifications in this sense. Also, 2022 FHA DTI Ratio Guidelines have borrowers with under 620 FICO score as higher risk and this will lead to them getting higher interest rates for the risk involved to write the loan. In addition to higher interest rate, verification of rent and timely payments will need to be shown.
2022 FHA DTI Ratio Guidelines allows for manual underwriting on FHA Loan Applications that cannot get an approval from Desktop Underwriter (DU) or borrowers that have a FICO score under 620. Manual underwriting is when an FHA Mortgage Underwriter manually underwrites an FHA Loan Application instead of going off of the Fannie Mae Automated Underwriting System. Manual Underwrites are a lot more frequent than you might think. One of the scenarios where you will find a manual underwrite is on all FHA Loans after a Chapter 13 Bankruptcy discharge that is within 2 years of the discharge date. The manual underwrite will be looking for verification of rent to ensure the borrower has 12 months of timely payments. The end-game of the manual underwrite is for the FHA Underwriter to have confidence in your credit history and your current-state and be confident you will be able to afford the loan.
The 2022 FHA DTI Ratio Guidelines, in terms of putting a requirement on a specific DTI ratio for a manual underwrite, don’t specify an exact DTI ratio they are looking for. In these cases, it will be up to the FHA mortgage underwriter to determine the credit worthiness of the borrower and if they can afford the loan. In most cases underwriters will be looking for a DTI ratio of around 43-45% but it is not uncommon for underwriters to approve all the way up to 53-55%. If the borrower has strong compensating factors such as a steady full-time job and even a full-time 2nd job this will go a long way in showing credit worthiness. However, if the borrower is going to use the income from the 2nd job they must be there for at least 2 years or the income cannot be counted in the ratio. If the underwriter has confidence in the 2nd job they can allow for a higher DTI ratio because they are confident the 2nd job will continue.