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The GSEs have recently changed their policies on how repayments made on student loans are handled in calculating debt-to-income ratios.
In addition, HUD/FHA is proposing 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:
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 (Refer to Selling Update 2015-12).
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. (Refer to Selling Guide – Section B3-6-05).
HUD/FHA
Probably the most radical change in underwriting policy being proposed in the handling of student loans is outlined in HUD’s 4000.1 Handbook (page #143) which is targeted to become effective on September 14, 2015.
Up until now, 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.
What is being proposed is that lenders will have to utilize 2% of the outstanding balance to establish the monthly payment on all deferred student loan debts and this payment will now count towards the DTI ratio.
However, if the student loan is in a repayment status and the actual payment can be verified then the actual payment must be used in calculating the DTI – even if the payment is less than 2% of the balance.
Loading ...Conclusion:
That loud rushing noise that you just heard is all of your Loan Officers running out to contact prospective FHA loan applicants that have student loans. They are advising them to start the process of obtaining a repayment plan with the lowest possible minimum monthly payment.
The changes implemented by both Freddie Mac & Fannie Mae will make it a little easier for borrowers with student loans to qualify for conventional mortgages. But, the HUD/FHA proposed changes will have a substantive impact on borrowers with deferred student loan debt – unless they act now to obtain (and start paying on) a favorable repayment plan.
Keep in mind that a very large majority of FHA borrowers are first-time homebuyers with little cash to put down. So, obtaining a conventional loan is not always an option.
A word to the wise!
