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.
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