April 14, 2016
The FHA is updating and clarifying the rules for deferred obligations as they pertain to how a lender is to calculate student loan debt. Lenders have, to this point, been required to include the amount of a borrower’s monthly student loan payment–or in the case of deferred payment, a percentage of the total amount.
However, the FHA recently issued a mortgagee letter informing lenders of changes to FHA policy.
According to HUD Mortgagee Letter 2016-08, the new guidance will affect “all FHA Title II forward mortgage programs with the exception of non-credit qualifying streamline refinances” and “provides documentation requirements and the standard for calculating monthly obligations for all student loans, regardless of payment type or status of payments”.
As background, the mortgagee letter states:
“With the implementation of Handbook 4000.1, FHA required Mortgagees to calculate a monthly payment for deferred Student Loans using 2 percent of the outstanding balance, and include the payment in the Borrower’s Debt-to-Income ratio for qualification purposes.”
“Further, FHA policy currently does not differentiate between non-deferred Student Loans, which are in payment plans that do not fully amortize the loan, and other Installment Loan debt. In furthering HUD’s mission of providing access to credit while ensuring Borrowers maintain a long term ability to repay their debt, the payment calculations for Student Loans, regardless of deferral status, are being amended.”
That is an important change in FHA loan rules. We get many questions in the comments section asking about these policies and now that they are about to change, it’s important to know how such alterations could affect future FHA loan applications.
We will cover the changes in-depth in a future blog post, but the most important alteration is found under the heading “Student Loans” and defines specifically how the lender is to calculate student loans for purposes of establishing the borrower’s debt to income ratio:
“If the payment used for the monthly obligation is:
–less than 1 percent of the outstanding balance reported on the Borrowers credit report, and
–less than the monthly payment reported on the Borrowers credit
report;
the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor.”
Furthermore, “Regardless of the payment status, the Mortgagee must use either:
–the greater of: 1 percent of the outstanding balance on the loan or the monthly payment reported on the Borrowers credit report;
or
–the actual documented payment, provided the payment will fully amortize the loan over its term.”
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http://www.fha.com/fha_loan_limits_widget
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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