The good news is that FHA has amended their policy, which I outlined in an August 2015 blog post. That post, was about the GSE’s underwriting policy with respect to borrowers with outstanding student loan debt and highlighted the proposed HUD/FHA new policy (upon implementation of Handbook 4000.1).
The policy in August required lenders to calculate a monthly payment for Student Loans using 2% of the outstanding balance and include this payment in the Borrower’s Debt-to-Income (DTI) ratio.
This was a major change in policy for FHA as deferred student loans (beyond a 12 month period) were previously not even counted in the Borrower’s DTI ratios.
This revised policy is effective immediately. However, lenders will be required to adhere to this new criterion for transactions that obtain their FHA case numbers on and after June 30, 2016.
FHA’s revised policy was announced via Mortgagee Letter 2016-08, dated April 13, 2016.
This new policy still requires all student loans to be counted as liabilities regardless of the payment type or status of payments. However, the lender must now use either the Greater of:
1) 1% of the outstanding balance of the loan (instead of 2%) OR
2) 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.
This change will now bring FHA’s policy more in-line with conventional underwriting requirements and will make it easier for prospective Borrowers to qualify for an FHA-insured mortgage.
This revised policy applies to all Title II forward FHA mortgage programs with the exception of non-credit qualifying refinance mortgages.
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