Deferred student loans used to be ignored on many loan applications, including the FHA loan. If your loan payments were not due for more than 12 months, the payment did not get included in the debt ratio used to qualify you for a loan, which meant that many homeowners were qualifying for more home than they could afford in the long run. Today, however, when you apply for an FHA loan, any deferred student loans must be included, even if the payments do not begin for more than one year. This is in an attempt to predict not only the current affordability of a new mortgage, but the future affordability as well.
How Deferred Student Loans Affect your Debt Ratio
When you apply for an FHA loan, you will have to consider the future payments that you will incur as a part of your debt ratio. There are a few ways that the bank will determine your payment in order to calculate your debt ratio.
- Loan documents – The most effective way to ensure that the right payment is used to calculate your debt ratio is to provide the loan documents from your student loan. These documents should show the amount of the future payments when they begin. This allows the lender to create an accurate debt ratio for you.
- The 5% rule – If you do not have loan documents, the FHA requires lenders to calculate 2% of the outstanding loan amount. For example, if you have $20,000 out in student loans, the payment used for calculating your debt ratio would equal $400. Chances are that your payment is nowhere near that $400 calculation, but without evidence, it is what the lender must use.
If your deferred loan is not a student loan, but any other type of installment loan, the lender is required to calculate a payment of 5% of the outstanding loan amount useless there is adequate evidence of a lower payment required by the bank.
Qualifying with Future Expenses Helps
It might seem unfair to include future expenses in your debt ratio, but the FHA created this requirement in order to prevent future default. By ensuring that you can afford the loan not only now, but when new debts start to become due, you can lower your risk of not only default, but of losing your home as well. While it definitely makes qualifying for an FHA loan more difficult, it is for the greater good of everyone involved in the loan.
When the future deferred loan payments get included with your loan approval, you will have a better idea of your cash flow a few years down the road if your income remains the same. This way there are no unpleasant surprises when your student loans become due.
The FHA created this new requirement, which began in September of 2015 in order to get a handle on the average amount of student debt, which totals close to $30,000! Without the need to include the future debt, many homeowners were finding themselves in hot water when the loan payments became due, forcing them to default either on the student loans or the mortgage payments; either way, consumers were defaulting on government debt, which hurts everyone I the long run.
The FHA loan is usually easy to qualify for and even with deferred student loans, it can still be considered easy to obtain, as long as you know what you are getting yourself into. If you are unsure of your future student loan payment, contact the issuing bank to get evidence of the payment so that an accurate debt ratio can be calculated for you.