November 15, 2016
A reader asks, “I am a mother who is on a fixed income of $1600.00 a month in ft laud. my son is going to be the co borrower who lives and works in LA. Makes a good salary. We already got pre-qualified up to 300k, our credit score is above 680…question is my son has student loan of 33k and is in forbearance until next year. Will this be a problem with (an) FHA loan?”
FHA loan rules in HUD 4000.1 instruct the lender on how to view debt, debt ratios, and the kinds of debt known as “deferred obligations” which may not affect the borrower’s debt to income ratio in the short term, but can do so after a home loan has closed. Sometimes, FHA loan approval may hinge on the amount of debt compared to the amount of income; too many financial obligations or obligations that eat up too much of the monthly income can be a problem for a lender in the loan processing phase.
Student loan debt that has been deferred is still factored into the borrower’s debt to income ratio using a percentage of the overall debt as an estimated monthly financial obligation. Payment on the student loans may not have started at application time, but the lender will be required to factor in that debt because it will eventually affect the borrower’s financial bottom line.
To answer the reader’s question specifically, the presence of student loan debt (deferred or not) does not in and of itself hurt a borrower’s chances at FHA loan approval. But the borrower’s debt ratio is a very important factor in loan approval, so the amount the deferred student loan may contribute to monthly financial obligations on top of other monthly payments will be important.
How much other debt does the applicant have? That’s a crucial question.
If a potential FHA borrower brings other types of debt to the table in the FHA loan application process on top of student loans, there may be an issue.
High credit card debt, for example, or smaller debt combined with auto loans or other larger credit lines could also be problematic. But some compensating factors could help balance out these issues depending on circumstances. A borrower who can make a larger down payment on the mortgage may find the lender more willing to work with the overall debt picture as long as the debt ratio is still within lender and FHA standards.
It’s often a very good idea to get some pre-purchase planning and counseling advice, which is why the FHA encourages potential borrowers to contact them at their toll-free number (1-800 CALL FHA) to request a referral to a local, HUD-approved housing counselor. This could be one of the best decisions a borrower makes in the planning stages of a new home loan-there is much to discuss in terms of preparing financially for the loan, house hunting checklists, budgeting for the loan, etc.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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