Do You Have an Outstanding or Deferred Student Loan?  Are You Applying for an FHA Loan?  The FHA Has Announced a New Standard for Calculating Student Loan Payments.

The US Department of Housing and Urban Development (HUD) has new policies in place relating to student loan calculation.  This announcement was made June 21st, 2021. The new calculation requirements of the monthly payment obligation will align better with the current industry standards for home loans.     

 Housing and Urban Development Secretary Marcia L. Fudge said “Homeownership is the cornerstone of the American Dream and the best way to build generational wealth. I am proud that FHA is taking action to make it easier for borrowers with student loan debt to qualify for a federally insured mortgage. This new policy will make a big difference for individuals throughout our nation and is another step in our mandate to promote equity and opportunity for homeownership.”

This policy addresses FHA Title II HECM and all forward mortgage programs.  This does not include non-credit qualifying streamline refinances, which do not require the Borrower’s debts to be calculated.    

Previous to the new guidelines, FHA policies did not address how Mortgagees should calculate future payments of deferred student loan debt which, once due, could negatively impact a Borrower’s long-term ability to repay their Mortgage. Additionally, FHA policy did not have separate guidelines for non-deferred student loans that are part of a repayment plan which does not fully amortize the student loan debt. This will distinguish the student loan debt from other Installment Loan debt.   

The Department of Education is expanding alternatives for student loan payment plans, including plans with variable amortization schedules based on Borrower’s income. HUD is adjusting the policy options available for calculating the monthly obligation of student loan liabilities. These changes are in line with HUD’s mission of providing access to credit, while ensuring Borrowers maintain a long-term ability to repay their debt.   

 The Required Documentation and Calculation of Monthly Obligation is being revised to provide for alternative payment options.   

Required documentation of Student Loan Obligation

If the monthly payment reported is less than the monthly payment on the Borrower’s credit report, the Mortgagee must obtain written documentation from the creditor or student loan servicer, reflecting the actual payment amount, the payment status, and evidence of the terms and outstanding balance. 

Calculation of Monthly Student Loan Obligation

• When the payment amount is above zero, the Borrower will be required to use the payment amount reported on the credit report or the actual documented payment amount.        
• If the monthly payment reported on the credit report is zero, the monthly payment will be recorded as 0.5 percent of the outstanding loan balance.    
• If is documented that the loan has been forgiven, canceled, or discharged in full, the payment can be excluded.

For additional Information and full policy, please see:  HUD Handbook 4000.1

Military members are encouraged to reach out to their respective branch for help with Tuition assistance. For example, the U.S. Army’s Tuition Assistance Program will continue to provide Soldiers with funds to assist in paying for voluntary higher education courses while the Army works to make improvements to its new tuition-assistance website.

For further guidance or questions, please contact your home loan professional at Fairway Mortgage.