How to Get an FHA Mortgage Loan with Student Loan Debt

FHA loans are sought after by many homeowners, including those with high debt. These loans are great for first time home buyers and others with low down payments. Some of the main attractions of FHA loans are:

• 3.5% down payment
• Acceptance of those with lower credit scores (580 or higher)

For students with $10,000s in student loans, it can seem like your home financing options are almost non-existent. You’ll be happy to know that isn’t the case. You can still apply for an FHA loan mortgage. 

In this article, you’ll learn how student loan payments affect FHA loans and how you can best position yourself for approval.

Debt-to-Income Ratio (DTI)

Your debt-to-income ratio is a determining factor in getting approved for an FHA loan. DTI adds up all of your monthly payments and divides them by your income. Monthly payments include:

• Car notes
• Credit card payments
• Student loans

As an example, say you earn $5,500 per month. You have the following payments: a car note of $300, credit cards totaling $600, and students loans of totaling $350. The total debt is $1,250. DTI equals $1,250/$5,500 = 23%.

When lenders look at DTI, many consider anything at or below 43% as good. This can vary among different lenders but 43% is a good rule of thumb. With a 23% DTI, you’d be in good shape. However, one thing is missing — your house payment.

Add a monthly payment of $1,500 and the debt now jumps to $2,750. DTI increases to $2,750/$5,500 = 50%, pushing this borrower well above the 43% guideline. Ultimately, this means the borrower will likely have a difficult time getting a home loan, no matter what kind it is. In this case, the best thing to do is pay down some debt and/or make more per month in an effort to get the monthly total debt payment below 43%.

Of course, there are many other factors that come into play. One is your credit score or FICO score. It’s good to know what this number is. Lenders might not approve anything below a 680 credit score. If you apply for a loan, unknowingly with a 640 credit card, you’d be rejected. As lenders check your credit, they’ll pull your credit report. This “hit” or “hard” check can further reduce your credit score by placing new inquiries on your credit report. Knowing you don’t have the minimum score needed can save you grief while you build up your credit.

FHA loans, as you’ll see, work a little differently when it comes to calculating DTI.

FHA Loan Requirements and Student Loan DTI Calculations

DTI is still critically important for FHA loan approval. Once student loans are factored in, DTI requirements become more strict. Using the above example, the student loan monthly payment is $350. Let’s say the total outstanding loan amount is $50,000.

In 2021, President Biden made it easier for student loan borrowers to get an FHA Loan - by easing the requirements of how to calculate DTI for borrowers on income-driven repayment plans.

On the third page of the June 17, 2021 Student Loans document produced by the U.S. Department of Housing and Urban Development, it states the following (Editor's Note: Formatting has been modified from original document):

“(4) Calculation of Monthly Obligation

For outstanding student loans, regardless of the payment status, the Mortgagee must use either:

• the payment amount reported on the credit report or the actual documented payment, when the amount is above zero; or
  
• 0.5 percent of the outstanding balance on the loan; when the monthly payment reported on the Borrower's credit report is zero.
  

0.50% of $50,000 is $250. In this case, $250 will be used instead of $350. That brings total debt along with the $1,500 mortgage payment to $2,800 and DTI to 51%. 3% more doesn’t seem like much but depending on the difference between the monthly student loan payment and the 1% calculation, it could be enough to push DTI above what lenders are willing to accept.

“This can push the debt-to-income ratio to a level where purchasing a home with an FHA loan is out of reach until that balance is reduced,” Justin Derisley, vice president of mortgage lending with the Troy, Michigan, office of Guaranteed Rate, told MortgageLoan.com.

As mentioned earlier, the way to get around this problem is to lower your debt by paying it down. If you’re on a student loan payment plan, it doesn’t make much difference. You can read more about payment plans and how to get a mortgage while on them here.

What If My Student Loan Has Been In Deferment?

A big issue for many borrowers with student loans has been the Covid-19 deferment. Most Federal student loan borrowers haven't had a payment in 20 months!

In this case, the lender would use the 0.50% calculation above to calculating the student loan payment amount for the DTI.

When payments resume, the payment documented on the credit report or the actual payment amount will be used.

Alternatives to FHA Loans

At the end of the day, because of DTI, an FHA loan may not be in the cards for you. That doesn’t mean you can’t get a home. A more traditional mortgage will use your student loan monthly payment rather than 1% of the outstanding amount in its DTI calculation. However, your down payment will be higher and credit score requirements may be more strict.

Once the higher down payment is factored in, it may not outweigh the benefits of paying down more debt. Both routes will require raising more cash. But consider that paying down debt will also positively impact your credit score. Depending on how close you are to getting below a 43% DTI, paying down debt might be the quicker path than trying to save for a full 20% down payment.

Comparing Loan Options

Whether you want to get an FHA Loan or other mortgage loan type, it's important you shop around. We recommend using LendingTree as a good starting off point to get the loan you need.

You can also look at online mortgage lenders but they don't operate in every state.