2021 FHA Student Loan Guidelines (New Changes!)

Certified Mortgage Advisor
NMLS 1701021
Published 
June 22, 2021

Student + FHA, how complicated?

Let's talk about FHA student loan guidelines for 2021 and some new changes that have happened. So FHA loans and student loans have not always mixed together very well. And if you try to apply for a loan with student loans, you've realized how much FHA can keep you from being able to be approved at all or reduce the amount that you can get approved for because of the way FHA looks at student loans, and this all comes into what's called the debt-to-income ratio. So even though your payment might be here, that you're actually paying on student loans, FHA is actually gonna disregard that most of the time, except for what's just changed with the rules.

Now, FHA is actually going to come in line a little bit more with what you pay in student loans, whereas before it kind of ignored what you paid and said, we're gonna make up our own rules for what we think you should be paying on these student loans. Very strange, but there's a new change that has made affordability increase a ton for people.

Old rule

So this is the 2021 update that has happened. The old rule with FHA basically said that you had to use the debt-to-income ratio, the greater of the credit report payment, 1% of the balance, and no income-driven repayment is allowed. So this is a killer for people, right? Because if you're on income-driven repayment, let's say it's at $0 a month or a hundred dollars a month. FHA would say, we know that you're paying this, but we don't care. And we're gonna take a higher amount. We're gonna take the 1% of the balance into your debt-to-income.

What is DTI?

The debt-to-income ratio is how much you're able to afford, uh, how much, uh, or more, how much a lender thinks you can afford, how much they're willing to give you in a loan.

New rule

Now, a new rule just came out that changed the entire game, and so now FHAs rules are very similar to a Freddie Mac conventional loan. So the new rule says, regardless of the payment status, so whether it's being paid or it's deferred, or it's in forbearance, what you can use is either the credit report payment or the documented payment above $0. So this can be something like income-driven repayment. If it is $0, use 0.5% of the balance. So if you're on income-driven repayment at $0, then you're going to use 0.5%. Right? So for instance, let's say you have $30,000 in student loan debt. That'd be a $150 per month payment included in the debt-to-income ratio.

Now keep in mind nothing changes with what you're paying under your student loans. The only thing that changes is what's included in the debt-to-income ratio. That's $150 per month. That's included meaning $150 less per month in your monthly payment that a lender would approve you.

Now income-driven repayment is allowed before income-driven repayment was only allowed on conventional and VA loans. VA loans are only for veterans and conventional. Harder to qualify for FHA and goes all the way down to a 500 credit score. You can do 10% down. If you have a 580 credit score, it's 3.5% down ad you can use income-driven repayment with student loans.

An example with $50,000 in student loan debt

It's important to remember here. This is all how much FHA is going to count towards the monthly debt-to-income ratio. So let's look at three scenario differences here between the old rule and the new rule as well.

$200 Credit report scenario

So let's say that you have a student loan payment and it's showing $200 per month on your credit report. So basically the way it's set up how much you're paying on your student loan is $200 per month. That's reported on your credit report. And you could find that on a free credit reporting site. So with the old role, they're going to use 1% of the balance, the greater 1%, even though. It was $200 in the credit report they're using the greater $200 or 1%, which is 500.

So they would use $500 per month instead the $200 that you're paying. With the new rule, they'll just say, great. Your credit report says 200. We'll use the 200.

$100 Income driven repayment

Let's say you were on an income-driven repayment plan. So you still have $50,000 in student loans. But income-driven repayment says that you only pay a hundred dollars per month with the old rule.

Again, they're not gonna use income-driven repayment. They're gonna use that greater of 1%. So $500 with a new role, you can use a hundred dollars per month. That's $400 per month in added flexibility that you can take on in your monthly debt. That's $400 extra in a mortgage payment that you could take on if you wanted to.

$0 Income driven repayment

Now let's say you have zero, $0 per month. Income-driven repayment, you're on an income-driven repayment and you actually don't have to pay your student loans at all. At the moment, with the old rule, it was $500. It was the new rule it's 0.5%, which is two 50 per month. Again, this is not actually changing what you pay on your student loans. This is only how the lender calculates your monthly debt.

$40k increase in purchase power

So this change right in here is actually a $40,000 increase in purchase power. Approximately that means that if you could qualify at this $500 a month with FHA, you can now get $40,000 more in purchase price if you needed it. So if you could, you were able to get approved for a $350,000 house. You can now get approved for a $390,000 housekeeping everything the same. Or maybe are at the point where you're saying, I actually wasn't even able to qualify at this point, but because I saved this extra 250 per month in here because of the new change, I can now get approved for an FHA loan whereas before I couldn't.

Delinquent or defaulted loans

So the one weird thing about FHA loans that don't exist for conventional is if you default or you're delinquent on these loans, and there are two different types of loans with your student loans.

Private student loans

So you have private student loans and you have federal student loans. So if you have a private student loan, that's defaulted or delinquent, it's going to be treated like a typical defaulted account. And basically what this means is you want to have 12 months of on-time payment. That's going to be the most ideal to get you approved FHA.

Federal student loans

Now, if it's federal debt, then we have a bigger issue. So you can not get an FHA loan. If you have a federal debt in the CAIVRS system.

CAIVRS

The CAIVRS system or Credit Alert Interactive Video Response System, basically you're on that if your loan is delayed, or in default. Basically, it's a system that the government has that they're going to make a repository of everyone who's delinquent or defaulted a federal debt. And basically say you can't get more federal debt if you haven't paid back the current federal debt on time.

So CAIVRS basically is just short for credit alert, interactive voice response system. And this is going to stick, even if it's not on your phone. So if you have a federal loan in debt, a federal student loan in debt, and it's not in your credit report, still will show up CAIVRS. The lender will pull a cavers report before they give you an FHA loan. You need to get out of cavers to make this work.

How to get off CAIVRS

So there are three options with the department of education. Number one, you can negotiate a settlement. That'll take one to two weeks to get out of default here, you could apply for loan consolidation. This will take two to three months to get out of default, or you can enter loan rehabilitation, which would take nine months to get out of debt.

So hopefully that's not a circumstance that you're running into, but this is an option if you need it. It is entirely possible to get approved for an FHA loan with student loans, especially with the new changes that have happened.

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