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If you’re in the market for a house with an FHA loan, you may be wondering how to qualify when you have student loans. Your monthly student loan payment is a big part of the equation lenders use to determine whether or not you’re approved and how much you can borrow.
But there’s some good news if you have student loans and are trying to get approved for an FHA loan. In June 2021, the FHA changed how lenders calculate student loan debt when applying for a mortgage. Here’s what’s different and how you can ensure your student loans won’t hold you back from qualifying for an FHA loan.
FHA Mortgages Explained
FHA mortgages are backed by the Federal Housing Administration (FHA). It’s a popular loan program for first-time homebuyers. You can get an FHA loan, whether it’s your first, second, or tenth house. Borrowers are drawn to the program because it offers low down payments, low closing costs, and easier credit qualifying compared to conventional loans.
While the FHA guarantees the mortgage, your loan will come from an FHA-approved mortgage lender. There are limits on how much you can borrow based on where you live. However, there are no income limits.
2021 FHA Student Loan Guidelines Update
Student loans have long been a hurdle to qualifying for a mortgage. But it got a little easier in 2021 — that’s when the FHA changed how student loan debt is calculated when applying for a mortgage.
Before June 2021, the FHA lender had to account for 1% of your student loan balance if you were in forbearance, deferment, or on an income-driven repayment (IDR) plan.
Here’s why that was a problem:
That amount was factored into your debt-to-income ratio, making it seem like you had much more debt than you really had. Higher debt-to-income ratios can lower the amount you’re allowed to borrow or make you ineligible for a mortgage loan. The new policy bases the amount on your actual student loan monthly payment. And that is good news for student loan borrowers everywhere.
How To Buy a House with Student Loan Debt
Having student loan debt does not prevent you from getting a mortgage. You have many options to help you qualify for an FHA loan.
Check Your Credit Score
Before applying for an FHA loan, check to see where you stand with your credit score. Make sure your credit report doesn’t have any errors. Errors are more common than you might think — more than one-third of Americans found at least one error on their credit report. If you find a mistake, contact the credit bureaus to have it corrected.
It helps to make credit card and loan payments on time, too. And don’t close any older credit card accounts (even if you are not using them) because longer credit history can help boost your credit score.
Improve Your Debt-To-Income Ratio
One factor lenders look at to determine how much you can borrow is your debt-to-income ratio. The lower your ratio, the less debt you have. Thus, the lender thinks you’re less risky. Focus on paying down credit card balances, car loans, and other debt. It’ll help to lower your debt-to-income ratio.
Lower Your Student Loan Payments
The Biden Administration extended the federal student loan interest and payment freeze through the CARES Act until January 2022.
If you have federal student loans, make sure you’re on the right repayment plan before payments start back up — you could lower your payment amount by choosing repayment based on your income.
Private student loan borrowers may be able to lower their monthly payments by refinancing. Refinancing to a lower interest rate or a longer repayment term are two simple ways to reduce your payment amount.
FHA Solutions for Home Buyers with Student Loan Debt
Still struggling to qualify for an FHA home loan? Here are some tips to help you get into your dream property.
Debt-to-Income Ratios Matter for FHA Loans
Your debt-to-income ratio is an essential factor for lenders. Reducing your debt-to-income ratio is a great step. Consider paying down credit card debt and other loans. However, you may still qualify if your ratio is as high as 43%.
Non-Occupying Co-Borrower
Adding a non-occupying co-borrower is another option to support your FHA mortgage application. This might be a family member who will not live in the home but will act as a co-signer to guarantee your loan. Non-family members can also be non-occupying co-borrowers. But keep in mind you’ll likely need a higher down payment if you go this route.
FHA Gift Funds for Down Payment
FHA home loans have one of the lowest down payment requirements. You typically need 3.5% of the purchase price. But there’s an option if you don’t have the necessary funds:
A family member or close friend can give you the money. They will need to provide you with a letter (that you give to your lender) saying the amount does not need to be repaid.
Applying for an FHA Loan
Think an FHA loan is right for you? We can help! Good News Lending is committed to matching student loan borrowers with the perfect mortgage for your situation. Get step-by-step guidance when you start the loan process today!
