The new FHA Loan Underwriting Handbook is now changing on 9/14/15. With those changes (that had been scheduled for June) there are significant changes to Deferred Student Loans FHA Mortgage Qualifications in NC. Currently, we are allowed to “ignore” deferred Student Loans, meaning they don’t affect your qualifying ratios.
Starting this fall we MUST count Deferred Student Loan Payments as we calculate what mortgage amount you qualify for.
Deferred Student Loans FHA Mortgage in NC
Effective this fall, FHA Mortgage Qualifications will more closely follow those of USDA Home Loan Underwriters… however there is a difference.
Deferred Student Loans FHA Mortgage Qualifications simply state that we must “establish” a payment. USDA Home Loan guidelines for Deferred Student Loans are pretty clear. The payment we establish for USDA Loan financing (when there’s deferred student loans of any kind) must show that the payment amounts will be fixed payments.
This means for USDA Loans (which require no down payment) you can’t be in an IBR or PAYE plan, where your payments are subject to change. You MUST convert those loans over to a FIXED PAYMENT status to qualify for a USDA Home Loan… and of course, we have to count those payments against you.
Again, the new FHA Loan Guidelines simply state that we must establish a payment.
Some Mortgage Loan Companies are “interpreting this” to mean that:
Even if a borrower has student loans deferred or in forbearance for up to 12-48 months, FHA is still forcing lenders to count the projected repayment amount into the borrowers DTI ratio. There are no exceptions to this.
FHA Loan Underwriters are telling us (and I’ve talked to like 7 different Companies to see what their Underwriting Department thinks) that FHA is only requiring us to DOCUMENT that you have payments for the next 24 months.
You might have NO PAYMENTS due for the next 24 months… but if you choose to go out of IBR or PAYE status, you could have a total of $228 a month.
Are we counting the $00.00 or the $228 amount.
The NEW FHA Guidelines state that if the ACTUAL payment is $00.00 then we are required to count 2% of the Balance as a payment amount!
The Guideline doesn’t take place until 9/14/15.
Until that time – if we can prove that you have Deferred Student Loans for at least the 12 months after closing, then we don’t have to count them at all against you to qualify for a mortgage to buy a house.
Good News? I’ve talked to multiple FHA Underwriters who are interpreting this guideline change for Deferred Student Loans FHA Mortgage Qualifications to mean that you DON’T HAVE TO change your payment plan over to a FIXED PAYMENT plan.
This is a SIGNIFICANT benefit for FHA Loan Borrowers.
What If We Can’t Establish A Student Loan Payment?
These New FHA Loan Guidelines state that:
If the actual monthly payment is not available for deferred installment debt, the lender must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment.
For a student loan, if the actual monthly payment is zero, the lender must utilize 2 percent of the outstanding balance to establish the monthly payment.
So, if you have a statement from your Student Loan Servicer that says current payment amount is $00.00 and the payment starting in October will be $00.00 then the Deferred Student Loans FHA Mortgage Qualifications that we must then count 2% of the student loan balance.
Lets take an example of a college graduate who has $35,000 in deferred student loans debt (because I can do this math in my head). If we have to count repayment on that debt at 2% of the balance, we just added an extra $700 month liability to qualifying for a house.
“If this person’s max qualifying purchase price is a $325,000 home (with 3.5% down payment & not including the deferred student loan payment), it’s quite possible FHA’s new guideline will reduce this borrowers buying power by 30% or more!!
In this real life example, the buyers new maximum qualifying purchase price (with 3.5% down payment AND Student Debt) would be reduced to less than $225,000! That’s at least a $100,000 reduction in buying power!”
“Home prices are currently rising more quickly than either per capita personal income or wages, narrowing the pool of future home buyers,” David Blitzer, chairman of the S&P index committee.
We agree that no longer excluding deferred student loan payments and slowing of wages will cause educated buyers to qualify to buy a house in NC at a slower pace.
It’s a big change, and it’s probably going to mean that more Millennial home buyers with deferred student loan debt will have a tougher time going down the path to home ownership once this rule goes into effect… because you could end up with higher than “accepted” debt to income ratios.
How High Debt To Income Ratios Work
If we count student loan debt that’s currently in deferment against you – it’s going to reduce how much a buyer can qualify for….that’s just how it is.
The College educated group of Millennial first time home buyers affected by this are typically looking for programs with low down payment features. FHA Loans offer the ability to get gift funds for the required 3.5% down payment, or you might qualify for a Mortgage Grant from the State.
FHA Mortgage Loans have two levels of the “Approval Process.”
The first level is pretty simple for folks with a middle credit score of at least 640. You could have a DTI, or Debt to Income ratio of up to 48% in some cases.
For those with lower scores, and those with debt to income ratios above 43%, you will be required to meet the “FHA Manual Underwriting” (read more restrictive) guidelines. Those “Manual Underwrite” FHA Home Loan Eligibility requirements include a more “difficult” set of qualifying ratios.
We believe home buyers with several hundred dollars of Student Loan Debt (that the new FHA Loan Rules will require us to count), are going to also be required to meet the Compensating Factor rules for High Ratio FHA Loans. These can ALSO be tricky to navigate, and frankly, not all mortgage companies have the ability to approve this type of borrower – because they consider them to be a higher risk. (WE CAN!)
Until these changes take effect, FHA Loans will continue to be the ‘go to’ loan program for buyers who have deferred student loan debt.
After 9/14/15 – VA Home Loan financing will be the only program that still excludes deferred student loans from qualifying.
If you have questions about Deferred Student Loans FHA Mortgage Qualifications in NC, your’e in luck! That’s where we come in – we help SOOO many folks who have various types of deferred student loans in NC, we know what WILL work, and what won’t. Please call Steve and Eleanor Thorne 919 649 5058. We work with First Time Home Buyers everyday, and we would love to be the mortgage lender you choose to help you buy your house!