New FHA Mortgage Guidance Will Impact Borrowers With High Student Loan Debt

Gentle Readers,

I was having dinner with Mabel recently and she had some bad news for me. The federal government has issued new guidance for FHA loans. This guidance will make it far more difficult for people with high student loan debt to qualify for a mortgage. Me. It will make it far more difficult for me to qualify for a mortgage.

The Federal Housing Administration insures mortgage lenders as a way to encourage home ownership in the US. The FHA does not issue mortgages, but mortgage lenders use the insurance to stay in business in case too many people enter foreclosure. The FHA has guidance for the type of qualifications a person must meet when applying for a loan. If you are eligible for an FHA approved loan, your down payment can be as low as 3.5% which is far more attainable than the standard 20% necessary to avoid PMI. Not all mortgages meet the qualifications for an FHA loan.

Part of what the FHA measures when determining your loan eligibility is your debt-to-income (DTI) ratio.  Naturally, student debt counts as debt. However, it can be difficult to know exactly how to count this debt. Borrowers are allowed to pay back under a number of different terms and conditions. You may have a 10, 20, or 30 year schedule with or without some forgiveness of the debt itself. It’s complicated.

What concerns me today is the new rules for those of us who are paying back our student loans on an Income Based Repayment (IBR) Schedule. In IBR, you pay a percentage of your income towards your debt each month. This is not an amortizing payment. It is not intended to efficiently wipe out your debt. It is intended to give financial breathing room to people with student loan debt that is high in proportion to their income. I pay roughly $500 a month toward my student loan debt because of IBR. If I was paying an amortizing payment, I would pay closer to $1500 a month.

The FHA has new guidance for mortgages for people under IBR. If I want to use an FHA Loan, they will calculate my monthly debt obligation in a new way now. They no longer consider what my IBR obligation will be each month, which makes sense as the IBR changes yearly based on last year’s income.

The pertinent changes:

FHA 4000.1 Section II. A. 4. B. (H)

(4)  Calculation of Monthly Obligation
Regardless of the payment status, the Mortgagee must use 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.

What this means for me personally at my current student loan debt levels is that I will likely be ineligible for an FHA loan.

  • If my student debt obligation was calculated as it is now incurred, it would be $500/ month.
  • If my student debt obligation was calculated at 1% of the loan balance it would be $1450/month.
  • If my student debt obligation was calculated as if I were in the process of fully amortizing my loan over a 30 year term, it would be $936/month.

These are very different debt calculations and will absolutely impact my ability to get a loan. The difference between $500 and nearly $1500 will be a killer on my DTI ratio, which must be under 43% in order to qualify for any loan.

If I make $4000 a month, and have a $1500 a month student debt payment and $650 in other obligations, I would have a DTI of 2150:4000. Over 43%.

If I make $4000 a month, and have $500/m student debt payment and $650 in other obligations, my DTI would be 1150:4000. Under 43%

This change is literally the difference between getting a home and not.

With an income of $4000 per month, the highest my debt obligation could be and still leave me eligible for a mortgage is $1720.  After subtracting my other obligations, I would need my other student loan obligation to be less than $1070/m.

To get to $1000 a month in student loan debt obligation, I would need to reduce my student loans to $100,000 from their current high of roughly $145,000.  Alternatively, I could attempt to  increase my earnings to $5000/m and then my 2150:5000 DTI would be 43%.

So, plans must change. I have to kill my student debt.

Previously, my plan of action for when my income doubles was to increase my investment payments at a far greater rate than paying down my student loan debt since I wanted to get the magic of compounding going. My new plan must be to reduce my debt obligation significantly.

When the income doubles, if I make $8000/m, at least $5000 needs to go towards student debt. I have two student loans. One of them is roughly $45000 currently. I will focus all extra payments on that one. In nine months of focused payments, that debt will be almost wiped out.

I would still be left with a student loan obligation that is roughly $100K. 1% of 100,000 is $1000. If I had that $1000 plus $650 in other obligations against an income of $8000/m, my DTI would be 1650:8000. I would be eligible for a loan. With a doubled income, the highest DTI I could have and still be eligible for a loan would be 3440:8000.

Has governmental guidance ever changed your plans in a major way?



Author: ZJ Thorne

Lesbian on the path to Financial Freedom

  • Holly Johnson

    I’m not up to date on these changes, but they only affect FHA loans, right? So you could feasibly get a traditional mortgage if your credit was good enough and your income helped you qualify. I agree that killing your debts should be a priority though!

    • I believe they only impact FHA loans, but with the home values in my area starting around $300,000 for rundown places, 20% down payments are just too much for most borrowers.

    • Vicki@MakeSmarterDecisions

      Definitely agree with Holly about killing those loans! But sorry about the change too! You have a great attitude to move forward though!

      • It helps if you have no choice 😉 The loans will be killed.

  • I’m sorry about the policy change, ZJ, but I’m encouraged by your attitude and I know you can do this! I think paying down a good chunk or more of your debt first is a good idea regardless. And don’t lose hope on the down payment issue. There are usually some other financing options like taking a primary mortgage for 80% of the value and financing another 10% via a second mortgage at a slightly higher interest rate. You got this. Keep kicking butt and you’ll get there.

    • I do think the policy change is good for America. I think we should stop subsidizing home ownership altogether.

      Thankfully, I want to increase my earning power anyway. This is extra incentive.

      I also know, but didn’t include, that a mortgage provider will average two years of earning. My AGI for 2015 was much lower because of my business write-offs. My averages are going to be all off, which means I’ll either need a big deposit or to wait longer to get a mortgage.

      I didn’t realize one could get two mortgages at the sametime. Thanks for that information.

  • Glad to hear you have a good plan for increasing income and paying down debt, and understand the ins and outs of this policy change. Can you imagine how many don’t have a good read on the situation until they’re much further in the home-buying process? Although this change doesn’t impact our situation, I hope your post helps others navigate it.

    • I’m so glad my friend gave me the heads up. I had no idea. It’s not well-publicized yet. Hopefully more folks will know before too far into their process.

  • These numbers and interesting, and quite disturbing. I’m sorry that you have to change your plans, but at least you know about and can make sense of these changes. I imagine that many others with huge amounts of student loans are going to be surprised about this new disadvantage to being well educated.

    • At least they can’t repo my brain.

  • Thank you for breaking this down, it’s really interesting to see how other countries do mortgages and lending – I’m a business banker in Melbourne by day. We have a similar option here for people without a 20% deposit, but it is an insurance which covers the additional risk to the bank, and adds an upfront premium cost for the borrower. Does your FHA system add an upfront cost?
    We also have a way to use the equity from another property, such as a parent, sibling or partner, to change the deposit calculation and get around the extra requirements with less upfront. The owner of the other property guarantees the loan but is not a borrower. I don’t know if you have the same?

    • We also have PMI (mortgage insurance) for loans whose down payments are not 20%. Some of your mortgage payments go to the PMI until that is paid off. FHA loans are just one type of loan available.

      We can have co-signers on a loan if your lender requires it based on your situation. I don’t know if that changes the deposit calculation.

  • Hey ZJ,

    Sorry to hear that your circumstances are more difficult for you. It sucks how many negative consequences debt has! It’s awesome you have a great plan to kill your debt, good luck!


    • Thanks, Tristan. I’m just glad I know now and have a plan.

      • Yes, exactly. It’s better knowing now so that you can affect your future in a positive way, rather than just giving up, or getting to that date in the future ad not having done anything.

  • Dollar Engineer

    ZJ unfortunately this just really sucks for you. On the bright side you’ve done a great job really diving into the details and numbers here to get out in front of the changes. Imagine if you found this out much farther down the line, before you developed a plan to pay down your debt ahead of schedule. Erasing $45,000 of debt in 9 months would be quite the accomplishment!

    • It does suck, but knowledge is definitely power. I’m working even harder to master that skill to double my pay. I want to be prepared for the next time one of those gigs comes up.

  • Argh – sorry, that’s annoying.

    The government here looks to be changing some rules for first home buyers that might have affected me if I hadn’t recently bought. With prices continuing to rise they keep having to increase the limits for the first home scheme, which kind of perpetuates the cycle.

    • It’s great you got in earlier. Useful to remember that government policies can change whenever and impact our well-laid plans.