By Nicole Rivers
When mortgage people talk about the constant change of the mortgage business, there is no exaggeration. Guidelines, regulations used to qualify borrowers, can yearly, and then in some cases, multiple times within a year.
FHA has announced an update to the student loan calculation guideline that went into effect in 2015. While this new change will not be required to take effect for all FHA loans until June of 2016, rest assured lenders are gearing up for the change. Potential borrowers, and other real estate professionals need to be aware and familiar with the affects of the new guidelines.
The new FHA guidelines for student loan debt calculation, effective June 2016, require lenders to use the following rule when calculating the monthly payment:
- Use 1% of the outstanding balance of the loan OR the monthly payment reported on the borrower's credit report, OR the amount documented on the monthly payment statement - whichever is greater of the three - as the payment amount included in a borrower's debt-to-income ratio
Remember, that all loans must be calculated as part of a borrower's DTI. FHA does not differentiate between deferred and non - deferred loans with regards to qualifying a loan.
In the case where documented monthly payment statement are used, the payment will need to reflect a fully amortized payment. A Fully Amortized means that each payment includes amounts o the principle and interest needed to pay the loan off in full at the end of the loan term. Borrowers using Income Based Repayment (IBR) plans, or other payment plans that allow for less than the fully amortized payment to keep payments affordable, are still subject to the new guidelines.
For example, a borrower enrolled in an IBR program produces documents for the lender that indicate her monthly payment is $0.00 per month. The lender will be required to use 1% of the total balance of the borrower's loans owed as part of her debt because, the indicated $0.00 payment is not fully amortized, and does not include the necessary principle and interest required to pay off the loan in full.
In addition, borrower's should be prepared to obtain additional documents for lenders who may requireproof of the outstanding balance, and loan terms, in some cases. Speak with your lender about your specific situation to find out what documentation is required.
It is worth noting that prior to this impending update lenders used 2% of the outstanding balance on all student loans to qualify potential borrowers which is proof that even though constant in the mortgage industry - change can still be good.
Please Note: This article is provided for illustrative purposes only. It is not an offer or commitment to lend money, and it is not an advertisement for a specific mortgage or a specific interest rate. Contact me to run the numbers for your situation.
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