Homeownership and education are both directly correlated to wealth. In the past, however, student loans could restrict a borrower from a mortgage. With some of the recent changes in federal mortgage lending rules, being approved for a mortgage loan has become more accessible for those with student loan debt.

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New FHA Student Loan Calculations

The Federal Housing Administration (FHA) declared changes in their student loan calculations; these changes are creating a better playing field for equity among first time home buyers. Let’s break down this change and explain the benefit of this calculation change.

Previously, FHA lenders would calculate a borrower’s monthly student loan payment as 1% of their total outstanding loan amount. However, this percentage does not always equate to the actual price the borrower pays a month. For example, if a borrower has $100,000 in student loan debt, the FHA will calculate that the borrower has a monthly payment of $1,000. The borrower may only pay $500 a month due to their personal repayment plan. Remember monthly payments are a significant part of the equation when determining a potential borrower’s mortgage rate. Therefore, overestimating a borrower’s monthly debt payment will negatively impact their ability to qualify for a mortgage.

Benefits of New FHA Student Loan

With the payment calculation change, FHA mortgage lenders may now use the actual monthly payment a borrower pays, even if it is below the typical 1% calculation. Said by Lopa Kolluri, Principal Deputy Assistant Secretary for the Federal Housing Administration, “these changes remove unnecessary constraints for otherwise creditworthy borrowers and reinforce FHA’s ability to serve those who need us most.” This minute change in FHA lending rules will have a rather large impact on addressing home equity moving forward.

Student Loan Payment Requirements

Each mortgage product has specific eligibility requirements. Regarding student loan payment requirements, below are the differences between FHA, Fannie Mae, Freddie Mac, USDA and VA loans.

FHA Requirements

Required monthly payment calculation:

  • Payment amount reported on the Credit Report, if greater than $.00; or
  • Actual documented payment; or
  • .50% of the outstanding loan balance, when the monthly payment reported on the Credit Report is $.00.
  • Approved Income Based Repayment Plan (IBR) if the IBR payment is greater than $.00

Fannie Mae Requirements

Required monthly payment calculation:

  • Credit Report if the payment is greater than zero; or
  • 1% of the outstanding loan balance; or
  • Documented fully amortized payment; or
  • Approved Income Based Repayment Plan (IBR)

Freddie Mac Requirements

Required monthly payment calculation:

  • Credit Report if the payment is greater than $.00; or
  • .50% of the outstanding loan balance; or
  • Approved Income Based Repayment Plan (IBR) if the IBR payment is greater than $.00

USDA Requirements

Required monthly payment calculation:

  • Fixed fully amortizing payment(s); or
  • Non-Fixed Payment(s)
  • Income Based Repayment (IBR) if the IBR Payment is greater than $.00; or
  • .50% of the outstanding loan balance when the payment is confirmed to be $.00

VA Requirements

Required monthly payment calculation:

  • Student loans deferred for 12 months from the date of the Note can be excluded from the debt-to-income ratio.
  • 5% of outstanding balance divided by twelve; or (Example: $100,000 X 5% = $5000/12 = $416.67)
  • Current documented payment plan.

Each loan type has different requirements and specifications. While these are available to you, it is helpful to work with a trusted lender to guide you through the process and answer any questions. If you have student loan debt, and want to discuss your home mortgage abilities, contact a team member today!

*Requirements as of April 19, 2022.