FHA Loan Policy Changes for Student Loan Debt Calculations
A press release on the HUD official site provides new instructions concerning how a participating FHA lender should consider student loan debt--changes that upgrade and improve the home loan processes for affected borrowers.
HUD 4000.1, the FHA Single-Family Loan program handbook, was not always the final word on FHA Single-Family loan policies (unless amended by mortgagee letters or other changes). Prior to HUD 4000.1, an older volume called HUD 4155.1 included rules for student loan debt.
But back then, FHA loan rules “did not address how Mortgagees should calculate future payments of deferred student loan debt which, once due, could negatively impact a Borrower’s long-term ability to repay their Mortgage and other monthly obligations” according to the HUD press release.
Under the old system, FHA loan rules did not consider deferred and non-deferred student loan debt separately. HUD 4000.1 was published as a replacement for HUD 4155.1.
Upon the change in handbooks, FHA loan rules were modified to require a participating lender to calculate a monthly payment for deferred student loans “at 2 percent of the outstanding balance and include that payment amount in the Borrower’s Debt-to-Income (DTI) ratio for qualification purposes.”
Circa 2016, the FHA published alterations to the payment calculation--rules published then instructed the lender to calculate either the greater of one percent of the outstanding balance on the loan OR the monthly payment reported on the Borrower’s credit report OR the “actual documented payment, provided the payment will fully amortize the loan over its term.”
Then there is FHA Mortgagee Letter 2021-13. That’s the official word that FHA student loan policies have changed again. The changes are designed to help borrowers keep access to credit while making sure an FHA loan applicant has the “long-term ability to repay their debt.”
The new rules include a section titled, Required Documentation and Calculation of Monthly Obligation. That portion of HUD 4000.1 has been modified to allow for alternative payment options, and also includes a definition of the term “student loans” to refer to “liabilities incurred for educational purposes.”
Under the new rules the lender is required to include “all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.” And what about cases where a student loan payment is less than the monthly payment reported on the applicant’s credit report?
Now the lender, “must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor or student loan servicer.”
The lender is permitted to exclude a payment from the borrower’s debt-to-income ratio, “where written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.”
And what about cases of outstanding student loans? In 2021 HUD directs the lender to use, “the payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero OR 0.5 percent of the outstanding loan balance, when the monthly payment reported on the Borrower’s credit report is zero.”
Ask a participating lender if you are not sure how this might affect your home loan application.
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