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The USDA recently published some guidance relative to how student loans should be treated with respect to calculating a Borrower’s monthly expenses. Also, the GSE’s previously changed their policies on how repayments made on student loans are handled in calculating debt-to-income ratios.
In addition, HUD/FHA implemented major changes in the way student loan debt is handled when calculating monthly obligations for prospective borrowers. Outlined below is a description of each of these changes:
USDA
The USDA has stated, in their March 31, 2016, News Release, that student loan payments must be included in the calculation of the total debt-to-income (DTI) ratio and captured under liabilities on the loan application. If the loan is a fixed payment with a set term and interest rate, the actual payment must be used in calculating the Borrower’s debt ratio. For deferred student loans as well as Graduated & Adjustable rate loans, 1% of the loan balance reflected on the credit report must be used as the monthly payment.
Freddie Mac
Effective for mortgages with Settlement Dates on or after August 1, 2015, the minimum monthly payment amount that must be included in the debt-to-income (DTI) calculation when a student loan is deferred and/or no monthly payment is verified is 1% of the outstanding balance of the student loan. Previously, 2% of the outstanding balance was used in determining the DTI.
Fannie Mae
Fannie Mae’s policy is for lenders to utilize 1% of the outstanding balance in calculating the DTI unless the actual documented payment is greater than 1%. If greater than 1% – utilize the actual payment in calculating the DTI. If the payment cannot be documented or verified – underwriters must use 1% of the outstanding balance in calculating the DTI ratio.
HUD/FHA
Probably the most radical change in underwriting policy, outlined in HUD’s 4000.1 Handbook (which became effective in September 2015) involved the handling of student loans.
Previously, HUD did not count student loan debts in calculating borrowers’ DTI ratios if it could be documented that the student loan was deferred beyond a 12 month period. With this change, Underwriters had to utilize 2% of the outstanding balance to establish the monthly payment on all deferred student loan debts and this payment counted towards the DTI ratio.
However, in my April 14, 2016, blog post I discussed HUD/FHA’s most recent change with respect to underwriting transactions involving Borrowers with student loans. Although all student loans must be counted as liabilities regardless of the payment type or status of payments, FHA will now require calculation of the obligation by using the greater of: 1% of the outstanding balance (instead of 2%) OR the actual documented payment reported on the credit report OR the actual 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 standards.
Loading ...In my opinion, the changes outlined above will make it a little easier for borrowers with student loans to qualify for home mortgages – which is welcome news as more and more Millennials are seeking to become homeowners for the first time.
