Student Loans and Debt-To-Income Ratios

Nov 17, 2014   //   by Ben Gerritsen   //   FHA Loans  //  Comments Off on Student Loans and Debt-To-Income Ratios
When you apply for an FHA loan, your lender must calculate the amount of income you have versus the amount of debt you currently pay on and factor in the amount of your projected mortgage. The amount of debt is compared to your income to determine whether or not you can afford the loan based on FHA guidelines.

In general, borrowers should have less that 40% of their income taken up by recurring financial obligations. FHA rules explain exactly how much debt to income you can have and still qualify for an FHA mortgage. These ratios can vary depending on the borrowers status as a self-employed person or other factors.

The overall debt picture is important when the lender is trying to figure out if a borrower is a good credit risk, but certain types of debt don’t factor in right away–for example, a student loan that is not yet due but may become due within a year or so of the home loan closing. Can this student loan debt be used in the debt-to-income ratio calculation?

FHA loan rules in HUD 4155.1 Chapter Four, Section C addresses this issue, stating:
“Debt payments such as a student loan or balloon note scheduled to begin or come due within 12 months of the mortgage loan closing must be included by the lender as anticipated monthly obligations during the underwriting analysis.”

However, FHA loan rules also add, “Debt payments do not have to be classified as projected obligations if the borrower provides written evidence that the debt will be deferred to a period outside the 12-month time frame.” Borrowers who have a student loan deferred in such a manner should bring paperwork to the lender to show this will happen–the lender will need to document this accordingly.

It may be best to request deferment paperwork before you start the loan application process for an FHA mortgage loan. This will speed the process up by having the paperwork ready to turn in with the other documents with your mortgage application. If you’ve already applied for an FHA loan and you don’t have the deferment paperwork, it is best to request the deferment paperwork on your student loans and request that they expedite the process in getting the deferment letter to you.

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