FHA’s new 4000.1 handbook states lenders can no longer exclude deferred student loan debt payments from a borrowers DTI ratio. This change in how FHA treats deferred obligations takes effect September 14, 2015, and may significantly reduce how much a buyer qualifies for when using FHA financing.
Essentially, deferred loans are no longer treated differently than other monthly obligations. Even if a borrower has student loans deferred or in forbearance for up to 12-48 months, FHA is still forcing lenders to count the projected repayment amount into the borrowers DTI ratio. There are no exceptions to this.
FHA’s decision to now include deferred student loan debt into a buyers DTI ratio is no joke. Even more Millennial homebuyers with deferred student loan debt will be shut out from be homeowners.
FHA’s guideline change isn’t just for deferred student loan debt, but for ALL deferred obligations.
How Much Will This Change Impact You?
It’s going to significantly reduce how much a buyer can qualify for….no doubt about that. People affected the most will be college educated, low down payment first time homebuyers, often with young growing families, which we have come to know as the Millennial age homebuyers.
Lets take an example of a college graduate who has $35,000 in student loans debt (that’s actually not much, it’s common to see many professionals well into their career carrying $100K+ in student loan debt).
Lets say the repayment on that debt is 2% of the balance (conservatively)……that’s an extra $700/month liability hitting a borrowers DTI ratio.
If this person’s max qualifying purchase price is a $325,000 home (with 3.5% down payment & not including the deferred student loan payment), it’s quite possible FHA’s new guideline will reduce this borrowers buying power by 30% or more!!
I’m not sure which major guideline change by FHA will hurt the housing market more, the reduced FHA loan limits or no longer excluding deferred student loan payments that causes educated buyers to qualify for far less than previously.
Unintended Consequences By FHA?
As if student loan debt isn’t stressful enough already, I suspect this change by FHA will lead to more and more young educated families having to rent for longer periods of time…that is just plain depressing.
Who knows….it could take 5-10 years for their incomes to increase enough to offset those student loans to the point they can qualify for a reasonably priced home……or they will just have to settle for smaller lower priced homes in less desirable communities.
This will surely reduce buyer demand at some level and scare many educated first time buyers away. Fewer buyers means homes sit on market for longer periods of time, fewer bidding wars, and homes tend to not appreciate as much.
FHA’s New Guidance on Deferred Debt in Qualifying Ratios
The following text is from the new FHA Single Family Housing Policy Handbook 4000.1. You can read for yourself on page 142 of Section (G) Deferred Obligations.
A Deferred Obligations refers to liabilities that have been incurred but where payment is deferred or has not yet commenced, including accounts in forbearance.
All lenders must include deferred obligations (including student loan debt) in the borrower’s monthly liabilities.
Lenders must obtain written documentation of the deferral of the liability from the creditor and evidence of the outstanding balance and terms of the deferred liability. The lender must obtain evidence of the anticipated monthly payment obligation, if available.
The lender must use the actual monthly payment to be paid on a deferred liability, whenever available.
If the actual monthly payment is not available for deferred installment debt, the lender must utilize the terms of the debt or 5 percent of the outstanding balance to establish the monthly payment.
For a student loan, if the actual monthly payment is zero, the lender must utilize 2 percent of the outstanding balance to establish the monthly payment.
If you have deferred student loan debt, do everything in your power to make sure the servicer provides what the projected payment will be in writing and hope that payment is lower than 2% or 5% of the outstanding balance.
Why Would FHA Change Their Guidelines on Deferred Student Loan Debt?
I think FHA, and the government in general, is seeing many young 25-30 something year olds coming out of college with boat loads of student loan debt with no ability to repay them.
The Government know’s that if they allow buyers to qualify for FHA loans when that $50,000 of student loan debt is deferred, and those payments come due 12 months later, the borrower will more likely default on the student loan debt rather than the mortgage payment.
Students graduating with their Bachelor, Masters, or Doctorate degree’s aren’t making the money they once were that is needed to service a mortgage, auto loans, and miscellaneous credit card debt.
Something has to give. I’m guessing the default rate on student loan debt is rising so the Government people called up FHA people and said….START counting the projected deferred student loan payment….done.
Makes sense, right? After all, lenders are required to comply with the Ability to Repay rule. If they don’t, lenders get fined or forced to by back the loans.
At the end of the day, it’s all about staying compliant and covering your a–.
Now Your Spouses Deferred Student Loans Can Get Your Loan Denied
If you are buying in a community property state like California, and using a government insured loan like FHA, VA, or USDA, your non-borrowing spouse must disclose their debt obligations.
FHA will now require the projected repayment for your spouses deferred student loans be counted as a monthly obligation. That alone could bump your DTI ratio above the maximum allowed.
To avoid any of your non-borrowing spouses debt from interfering with your mortgage qualifying, you can use a Fannie Mae 97% LTV, a Freddie Mac Home Possible Advantage, or the 3% down MyCommunity Mortgage program.
Get the Facts: Options to Qualify for More
I hate to sound like I’m being overly dramatic, but changes like this can severely limit or prevent many people from buying a home. FHA was the ‘go to’ loan program for buyers who had deferred student loan debt….but no longer.
VA financing is now the only program that still excludes deferred student loans from qualifying.
If you can find a non-occupied co-borrower who has decent credit and solid income, that may help you offset the deferred student loan payments and qualify for more.
If eligible, a Mortgage Credit Certificate may help boost a buyers income enough to offset a deferred student loan.
If you want to explore all your home financing options and find out how to qualify for more, along with receiving accurate funds needed for closing and payment info, contact me here or call 951-215-6119.
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