Date: June 17, 2021
Mortgagee Letter 2021-13
To:
- All FHA-Approved Mortgagees
- All Direct Endorsement Underwriters
- All Eligible Submission Sources for Condominium Project Approvals
- All FHA Roster Appraisers
- All FHA-Approved 203(k) Consultants
- All HUD-Approved Housing Counselors
- All HUD-Approved Nonprofit Organizations
- All Governmental Entity Participants
- All Real Estate Brokers
- All Closing Agents
Subject: Student Loan Payment Calculation of Monthly Obligation
The purpose of this mortgage letter (ML) is to inform mortgagees of new student loan calculation requirements of the monthly payment obligation to align better with the current industry standards.
Effective Date: This guidance is practical for all case numbers assigned on or after August 16, 2021. However, Mortgagees may begin using the policies announced in this ML immediately. All policy updates will be incorporated into a forthcoming update of HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook (Handbook 4000.1), and the HECM Financial Assessment and Property Charge Guide.
Public Feedback: The U.S. Department of Housing and Urban Development (HUD) welcomes feedback from interested parties for 30 calendar days from the date of issuance. To provide feedback on this policy document, please send feedback to the Federal Housing Administration (FHA) Resource Center at [email protected]. HUD will consider the input in determining the need for future updates.
Mortgagee Letter 2021-13, Continued
Affected Programs
This guidance applies to all FHA Title II HECM and forward mortgage programs except non-credit qualifying streamline refinances, which do not require evaluating the Borrower’s debts.
Background Before the publication of Handbook 4000.1, FHA policies did not address how Mortgagees should calculate future payments of deferred student loan debt, which, once due, could negatively impact a Borrower’s long-term ability to repay their Mortgage and other monthly obligations. Further, FHA policy did not distinguish between non-deferred student loans that are part of a repayment plan that does not fully amortize the student loan debt from other Installment Loan debt.
With the publication of Handbook 4000.1, FHA required a Mortgagee to calculate the monthly payment for deferred student loans at 2 percent of the outstanding balance and include that payment amount in the Borrower’s Debt-to-Income (DTI) ratio for qualification purposes.
In April 2016 and July 2016, FHA published ML 2016-08 and ML 2016-10, respectively, adding a separate “Student Loans” section in Handbook 4000.1 and the HECM Financial Assessment and Property Charge Guide amending the payment calculation to
- Either the greater of:
- 1 percent of the outstanding balance on the loan; or
- 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.
In recognition of the expanding student loan payment plan alternatives offered by the U.S. Department of Education, including plans with variable amortization schedules based on the Borrower’s income, HUD is adjusting the policy options available for calculating the monthly obligation of student loan liabilities. These changes seek to further HUD’s mission of providing access to credit while ensuring Borrowers maintain a long-term ability to repay their debt.
Summary of Changes
The Required Documentation and Calculation of Monthly Obligation sections of HUD’s current student loan policies are being revised for an alternative payment option. These changes will be reflected in the following HUD policy references: HUD Handbook 4000.1sections II.A.4.b.iv(H) Student Loans (TOTAL) and II.A.5.a.iv(G) Student Loans (Manual), and HECM Financial Assessment and Property Charge Guide section 3.83 Student Loans.
Single Family Housing Policy Handbook 4000.1
II.A.4.b.iv(H) Student Loans (TOTAL)
(1) Definition
Student Loans refer to liabilities incurred for educational purposes.
(2) Standard
The Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.
(3) Required Documentation
Suppose the payment used for the monthly obligation is less than the monthly payment reported on the Borrower’s credit report. In that case, the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor or student loan servicer. The Mortgagee may exclude the income from the Borrower’s monthly debt calculation where written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.
(4) Calculation of Monthly Obligation
For outstanding Student Loans, regardless of payment status, the Mortgagee must use:
• the payment amount reported on the credit report or the actual documented payment when the payment amount is above zero or
• 0.5 percent of the outstanding loan balance when the monthly payment reported on the Borrower’s credit report is zero.
II.A.5.a.iv(G) Student Loans (Manual)
(1) Definition
Student Loan refers to liabilities incurred for educational purposes.
(2) Standard
The Mortgagee must include all Student Loans in the Borrower’s liabilities, regardless of the payment type or status of payments.
(3) Required Documentation
Suppose the payment used for the monthly obligation is less than the monthly payment reported on the Borrower’s credit report. In that case, the Mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor or student loan servicer.
The Mortgagee may exclude the payment amount from the monthly debt calculation where written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.
(4) Calculation of Monthly Obligation
For outstanding Student Loans, regardless of payment status, the Mortgagee must use:
• the payment amount reported on the credit report or the actual documented payment when the payment amount is above zero or
• 0.5 percent of the outstanding loan balance when the monthly payment reported on the Borrower’s credit report is zero.
HECM Financial Assessment and Property Charge Guide 3.83 Student Loans
Student loan refers to liabilities incurred for educational purposes. The mortgagee must include all student loans in the expense analysis, regardless of the payment type or status of payments. If the payment used for the monthly obligation is less than the monthly payment reported on the borrower’s credit report, the mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor or student loan servicer.
For outstanding student loans, regardless of payment status, the mortgagee must use:
• the payment amount reported on the credit report or the actual documented payment when the payment amount is above zero or
• 0.5 percent of the outstanding loan balance when the monthly payment reported on the borrower’s credit report is zero.
The Mortgagee may exclude the payment amount from the monthly debt calculation where written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.
Paperwork Reduction Act
The information collection requirements in this document have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB Control Number 2502-0059 and 2502-0524. By the Paperwork Reduction Act, HUD may not conduct or sponsor and a person is not required to respond to a collection of information unless the collection displays a currently valid OMB Control Number.
Questions
Any questions regarding this ML may be directed to the FHA Resource Center at 1-800-CALL-FHA. Persons with hearing or speech impairments may reach this number by calling the Federal Relay Service at 1-800-877-8339. For additional information on this ML, please visit www.hud.gov/answers.
Signature
Lopa P. Kolluri
Principal Deputy Assistant Secretary
Office of Housing – Federal Housing Administration
What You Need to Know
Mortgage lenders will consider your debt-to-income ratio (DTI) if you are carrying student loan debt and applying for a mortgage. The approach to handling student loans can differ among lenders and various mortgage plans, and in some cases, the amount of student loan debt outstanding could impede potential homebuyers.
However, there is encouraging news for borrowers with student loans. In June 2021, the Federal Housing Administration (FHA) updated its guidelines regarding student loans. These revisions have eased some of the conditions, thus facilitating the process for those with student loans to qualify for an FHA mortgage.
It’s important to note that the FHA doesn’t directly issue mortgage loans. Instead, it provides insurance for the loans it backs. This insurance reduces the risk for lenders, allowing them to offer mortgages with more favorable terms, such as lower down payments and more lenient credit score requirements to borrowers.
Guidelines for FHA Student Loan Eligibility
Securing an FHA loan is a compelling route for prospective homeowners, especially due to its low down payment requirement of just 3.5% for those who qualify. Additionally, applicants are generally required to have a credit score of 580, though in certain circumstances, a score as low as 500 may suffice. This accessibility broadens the pathway to homeownership for many individuals.
Traditionally, student loan borrowers might have been disadvantaged due to lenders’ use of the “1% rule” in their debt-to-income calculations. This rule allowed lenders to factor in either the monthly payment on the borrower’s credit report or 1% of the student loan’s total balance—whichever was higher—into the DTI calculation. For example, with $120,000 in student loans, a borrower might be assumed to have a $1,200 monthly payment for DTI purposes. Such a calculation could negatively affect the chances of loan approval for borrowers on income-driven repayment plans with substantially lower monthly payments.
The updated FHA student loan guidelines introduced in June 2021 have altered this scenario. The new policy states that for any outstanding student loan balance, lenders are to use:
The actual student loan payment amount as shown on the borrower’s credit report or the documented payment, so long as the monthly payment is more significant than $0, or 0.5% of the outstanding student loan balance if the monthly payment reported on the credit report is $0.
These changes can significantly benefit FHA loan applicants by allowing lenders to use a figure that more accurately reflects their actual monthly student loan payments.
Impact of Student Loan Repayment Status on FHA Loan Applications
Under the FHA student loan guidelines, lenders must factor in student loans when determining an applicant’s DTI ratio, irrespective of the loan’s repayment status or the repayment plan in place.
In situations where a borrower is making regular payments, the monthly amount is included in the DTI calculation. However, for those in deferment, forbearance, or specific income-driven repayment plans – or those benefiting from temporary measures like COVID-19 forbearance – a $0 payment may be reported.
Under the revised guidelines, if the reported payment is $0, lenders will now use 0.5% of the student loan balance for DTI calculations, a reduction from previous standards. Although this revised figure may still result in a DTI that reflects a higher payment than what the borrower is paying – or not paying, in the case of $0 payments – it is nonetheless a more favorable consideration for potential homeowners. It’s important to note that FHA loans are not available to individuals whose student loans are in default.
Understanding the Debt-to-Income Ratio for FHA Mortgages
The debt-to-income ratio is a key factor in FHA mortgage applications. This ratio measures your total monthly debt payments against your total monthly income.
For instance, with a monthly income of $5,000 and monthly debt obligations of $1,000, your DTI ratio would be 20%. To be eligible for an FHA loan, your DTI ratio – including your potential mortgage payment – should generally be at or below 43%. In this example, that would allow for a mortgage payment of up to approximately $1,100 per month.
$1,100 (mortgage payment) + $1,000 (debt obligations) = $2,100
$2,100/$5,000 (income) = 0.42 X 100 = 42%.
Documentation Requirements for Student Debt When Applying for an FHA Loan
When applying for an FHA loan, your lender may require detailed documentation regarding your student loans. Per Mortgagee Letter 2021-13, if the monthly payment you’re responsible for is lower than the payment reflected on your credit report, you must provide written evidence confirming your loan’s balance, monthly payment amount, repayment status, and term. This verification typically comes from your student loan servicer.
Contact the servicer responsible for handling your student loan repayment to obtain the necessary information.
Furthermore, your monthly payment might be disregarded in the loan application process if you can demonstrate through your loan servicer that your student loan debt has been paid in full or forgiven.
If your student loans have been discharged through programs like Public Service Loan Forgiveness (PSLF) or other forgiveness schemes, these discharged debts should not be factored into your DTI ratio. Excluding a forgiven or discharged student loan could potentially enhance your chances of loan approval.
Treatment of Federal vs. Private Student Loans by FHA Lenders
The FHA, in conjunction with the U.S. Department of Housing and Urban Development (HUD), offers FHA loans and generally applies the same DTI consideration for both federal and private student loans.
However, there is a notable distinction regarding loans in default. Given that the FHA is a federal entity, having defaulted on federal loans disqualifies you from an FHA loan. Lenders must check the Credit Alert Verification Reporting System, which records individuals with delinquent federal debt, including those with defaulted federal student loans.
For private student loans in default, there isn’t an equivalent comprehensive database. Nevertheless, a default can still adversely impact your loan eligibility since the default may be reported on your credit report or could significantly lower your credit score.
Regardless of whether your defaulted loans are federal or private, it’s crucial to resolve the default and restore your financial standing to improve your chances of qualifying for FHA home financing.
✿ Learn More: Student Loan Basics Answers.
