FHA Change In Calculating Deferred Student Loans

Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

On September 14, 2015 FHA released their new Handbook 4000.1 which contained several New FHA Change In Calculating Borrower Debt.  Among the the New FHA Change In Calculating Borrower Debt were:

  • Authorized Users On Credit Cards
  • Debts With Less Than 10 Months Of Monthly Payments
  • 30 Day Accounts

But none of the FHA Changes In Calculating Borrower Debt-To-Income (DTI) Ratios, had more impact on a Borrower's ability to qualify for a mortgage, than the change FHA made to calculating Deferred Debt.  In particularly the FHA Change In Calculating Deferred Student Loans.

Prior to September 14, 2015, the FHA Guideline on deferred Student Loans were very favorable, but not realistic.   If the Deferred Student Loan was not going to go into repayment within 12 months of the Mortgage Closing, the payments were listed, but not calculated into the Total DTI Ratio.  This opened the door for payment shock once the Deferred Student Loans went into repayment all at once.

On September 14, 2015, regardless of when the Deferred Student Loan was going into repayment, it was calculated into the Borrowers Total DTI Ratio.  This was the same guideline Fannie Mae backed loans have.  However, FHA went above and beyond the Fannie Mae DTI guideline calculation.

Fannie Mae calculates 1% of the outstanding deterred Student Loan as the monthly payment.  BUT with the September 14, 2015 FHA Guideline Change, FHA began to calculated the monthly payment on outstanding Deferred Student Loan as 2% of the loan amount.  However, FHA did provide an exception.  If Borrowers with Deferred Student Loans, were able to obtain a letter from the Lender they obtained the Student Loan from stating what the actual monthly payment would be, then the actual monthy payment could be used in place of the 2%.  This is a feature the Fannie Mae guideline does not have.

Going from not calculating Deferred Student Loans in the DTI, to calculating the monthly payment on outstanding Deferred Student Loan as 2% of the loan amount, was a HUGE change!  2% in most cases is twice as much as the monthly Student Loan payment will be when the Student Loan goes into repayment.  This change disqualified a huge number of young Borrowers who had Deferred Student Loans from obtaining an FHA Mortgage, if they were not able to get a letter from the Lender stating what the monthly would be when the Deferred Student Loan went into repayment.

As of this Wednesday, April 14, FHA came out with Mortgagee Letter 2016-08 reducing the percentage in calculating Deferred Student Loans to the same as Fannie Mae.  This week FHA decreased their percentage from 2% to 1%. 

Under the new guideline the Deferred Student Loan Calculation will be determined by:

  • The greater of:
    • 1% 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.

So if the actual monthly payment is lower than the 1%, the lower payment can be use if the Borrower can obtain a letter from the Lender stating "the actual documented payment, provided the payment will fully amortize the loan over its term."  Again this is a feature the Fannie Mae guideline does not have, and will allow more Borrowers with Deferred Student Loans to qualify for a mortgage. 

While this new FHA guideline change will still continue to make it more difficult for Borrowers with Deferred Student Loans to obtain a mortgage, it is more realistic than both the September 14, 2015 guideline, and the prior guideline.  The FHA Guideline prior to September 14, 2015 created a situation for payment shock when the Deferred Student Loan(s) went into repayment.  While the FHA September 14, 2015 guideline took away the payment shock, it created an unrealistic percentage to be used in calculating the Debt-To-Income (DTI) Ratios.

It is encouraging to see FHA make adjustments to some of their recent Guideline changes, and making it more favorable for Borrowers to qualify for an FHA Loan.  The new FHA Change In Calculating Deferred Student Loans  is not going to bring FHA back to the go-to Mortgage Loan Product FHA use to be, but it is a step in the right direction.




 Info about the author:

George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com


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Sham Reddy
H E R Realty, Dayton, OH - Dayton, OH

Thanks for sharing!!!

New FHA Change In Calculating Borrower Debt.  Among the the New FHA Change In Calculating Borrower Debt were:

  • Authorized Users On Credit Cards
  • Debts With Less Than 10 Months Of Monthly Payments
  • 30 Day Accounts
Apr 16, 2016 10:06 PM #9
Dorie Dillard
Coldwell Banker United Realtors® ~ 512.346.1799 - Austin, TX
Serving Buyers & Sellers in NW Austin Real Estate

Good morning George Souto ,

Excellent information..thanks for the update. The rules are always changing..glad to know you are keeping on top of them!

Apr 16, 2016 11:16 PM #10
Tony and Suzanne Marriott, Associate Brokers
Haven Express @ Keller Williams Arizona Realty - Scottsdale, AZ
Serving Scottsdale, Phoenix and Maricopa County AZ

"While this new FHA guideline change will still continue to make it more difficult for Borrowers with Deferred Student Loans to obtain a mortgage, it is more realistic than both the September 14, 2015 guideline, and the prior guideline." Agreed George Souto - and re-blog!

Apr 16, 2016 11:18 PM #11
Joan Cox
Metro Brokers - House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

George, you always supply us with updated lending rules, and not sure how you can keep up with all the changes!  

Apr 16, 2016 11:55 PM #12
Dinah Stallworth
Priority Real Estate LLC - 800.978.4847 - Natchitoches, LA

Great information and a step in the right direction. Another excellent blog.

Apr 17, 2016 12:11 AM #13
Shirley Coomer
Keller Williams Realty Sonoran Living - Phoenix, AZ
Realtor, Keller Williams Realty, Phoenix Az

Thanks for the great information.  I tell my clients I am a Realtor, for their lending questions they need to talk to a great lender, because rules are always changing!

Apr 17, 2016 12:24 AM #14
Rob Spinosa
Supreme Lending, Marin County, CA - Mill Valley, CA
Executive Loan Advisor, Marin Mortgage Pro

I understand the need for qualifying payments but always struggle with payment factors where they exist.  I'm a far bigger fan of qualifying off ACTUAL payments.  I'm glad to see FHA align more with what we're seeing in the industry.  But what I really want to convey here is that I think it's high time that college counselors and students start leveling with the realities of student loan debt.  They need to start having serious conversations about the amount of debt taken on relative to the earning of degrees that cannot realistically pay them back.   We already have enough restrictions in qualifying buyers.  When former students show up at our door, it's often too late to solve the fundamental problem that their jobs cannot support both a new home and the ghost of their improperly planned education.

Apr 17, 2016 12:42 AM #15
Kathleen Daniels
KD Realty - 408.972.1822 - San Jose, CA
San Jose Homes for Sale - Probate Broker

George, Do the clowns that make these decisions have any clue as to what they are doing ... or why?  It's 1% ... now its 2% ... Oh wait, let's change it back to 1%. more head spinning moments in the mortgage lending industry. 

Apr 17, 2016 01:10 AM #16
Joe Petrowsky
Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT
Your Mortgage Consultant for Life

Good morning George. It seems like things constantly change when it comes to guidelines, many of the ones that exist these days hurt many prospective buyers.

A well deserved feature.

Apr 17, 2016 01:57 AM #17
Bill Roberts
Brooks and Dunphy Real Estate - Oceanside, CA
"Baby Boomer" Retirement Planner

Hi George Souto  this is all very interesting, but most Millennials aren't in the market to buy a house anyway.

Bill Roberts

Apr 17, 2016 02:49 AM #18
David Alan Baker Laveen Realtor & South Phoenix Realtor
HomeSmart - Laveen, AZ
Your local Expert

Good to know loan stuff.  Thanks for sharing.

Apr 17, 2016 03:42 AM #19
Sally K. & David L. Hanson
Keller Williams 414-525-0563 - Brookfield, WI
WI Realtors - Luxury - Divorce - Short Sale

yes George Souto that IS huge...working with two buyers now who have monster education debt but will soon be homeowners !

Apr 17, 2016 07:43 AM #20
Mark Robinson
Geneva Financial, LLC - Beachwood, NJ
Honesty, Integrity, Service

That was a huge change. I had a couple of borrowers the the 2% calculation really hurt. I was lucky enough to get proof of what the actual payment would be but at 1% that wouldn't have been necessary. The actual payments were a little less than 1%.

Apr 17, 2016 08:31 AM #21
Lisa Von Domek
Lisa Von Domek & Associates LLC Team - Dallas, TX
....Experience Isn't Expensive.... It's Priceless!

And this is why we need mortgage professionals like you George Souto, to stay on top of the never ending changes in mortgage lending!  

Apr 17, 2016 08:59 AM #22
Lise Howe
Keller Williams Capital Properties - Washington, DC
Assoc. Broker and Attorney Licensed in DC, MD, VA,

George - thanks for educating all of us on the FHA guidelines.  We need mortgage professionals like you to keep us up to date. 

Apr 17, 2016 11:35 AM #23
Debra Leisek
Bay Realty,Inc Homer Alaska - Homer, AK

Very good Information and quite timely Student Loans come up a lot these days. Seems like Young people still want to buy a home and pursue the American Dream! ! Thank You!

Apr 18, 2016 07:45 AM #24
Gary L. Waters, Broker Owner, Waters Realty of Brevard, LLC
Waters Realty of Brevard, LLC - Rockledge, FL
... a small office, delivering big service!

That is a big change. With things like student loans it is critical buyers have a knowledgeable mortgage go to person - like you George Souto .

Apr 18, 2016 11:00 PM #25
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

Interesting and good change.  Not really the topic of your post, but even as a far right person I think Student Loans are one of the biggest rip offs and scams in this history of this country.  Basically they are getting people into a non dischargeable debt with the promise of good jobs.  It is slavery.  

Apr 19, 2016 04:48 AM #26
Ron Aguilar
Continental Mortgage - Saint George, UT
Mortgage & Real Estate Advisor since 1995

The daily changes is not the problem. The problem is when a Loan Officer is not given enough time to carefully evaluate the borrower. Oh thats right, the Loan Officer may have a magic wand to wave when everyone is in a real hurry. Or when the agent says, we better hurry the home is getting multiple offers and we don't want to lose it...

Apr 19, 2016 06:19 AM #27
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert

This will enable many more people to qualify for a mortgage and get into homeownership.


Sep 10, 2017 07:55 PM #28
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