FHA Announces Amended Policy for Student Loans

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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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About the Author

Gerry Glavey

Gerard (Gerry) Glavey is Senior Vice President / Chief Credit Officer for LoanLogics. Gerry has decades of experience working in residential mortgage credit and compliance and brings insights that few in the industry can match. In his role, he develops new services and provides support for all post close quality control and quality assurance, pre-close quality control, due diligence services, and document processing services. He spent 37 years with the US Department of Housing and Urban Development, where most recently he was the Director, Processing and Underwriting Division for the Home Ownership Center (HOC) in Philadelphia. In this capacity, Mr. Glavey was responsible for the administration of all HUD/FHA Single Family Loan Origination activities, including underwriting, appraisal and endorsement for the 16 state jurisdiction of this HOC.