FHA loans are one of the many types of mortgage loans you can use to buy a house. With low down payment and credit score requirements, they’re a popular choice for first-time homebuyers and those with limited budgets and income.
Still, there are some financial standards you’ll need to meet to qualify, and if you have student loans, those will likely play a big role.
Do you have student loan debt? Here’s how it could impact your ability to get an FHA mortgage loan and buy a house.
In a nutshell
Having student loan debt doesn’t outright prohibit you from getting an FHA mortgage, but it can impact your ability to qualify. This is because your debts play into your DTI (debt-to-income ratio), which is an important factor in assessing mortgage risk. A higher DTI can make it harder to qualify, while a lower one will make it easier.
Fortunately, the FHA loan program has unique rules for approaching student loan debt. These rules can help student loan borrowers more easily qualify for an FHA mortgage than they could for other mortgage loan programs.
Can you get an FHA loan with student loan debt?
Yes, you can get an FHA loan with student loan debt in your name as long as you do not have federal student loans in default. Because FHA loans are also federally backed loans, this would disqualify you from the FHA loan program, as well as other government mortgage programs like VA and USDA loans.
Your student loan balances, monthly payments, income, and other debts will play a role in whether you qualify, too, as these all impact your debt-to-income ratio — or how much of your monthly income your debt payments take up. DTI is a key factor in any mortgage application, and each loan program has specific maximums you’ll need to fall under to qualify.
FHA loans generally have flexible DTI requirements compared to other loans. While many lenders prefer to see a DTI of 43% or lower, FHA guidelines can allow for higher ratios, even up to 55%, especially if your loan is approved through automated underwriting. This flexibility can make it easier to qualify, even if you carry other monthly debt obligations like student loans or credit cards.
Fortunately, the FHA updated its student loan guidelines and adjusted its approach to student loan debt a few years ago, so student loans may not affect your DTI as much as you think.
Previously, the FHA used a flat 1% of your student loan amount as your monthly “payment” when calculating DTI. Now, the FHA will take your actual monthly payment (as reported on your credit report) or 0.5% of the loan balance if a monthly payment is not available or your loan is in forbearance or deferral.
This is helpful because many student loan borrowers are not making full principal-and-interest payments each month and are instead paying a reduced amount. Suppose you qualify for an income-based repayment plan, for example. In that case, you might pay anywhere from 0 to 20% of your discretionary income (which, depending on how much you borrowed for your education, could very well be much less than 1% of your total loan balance).
Example DTI Calculation With Student Loan Debt
| Student loan payments | $100/month |
|---|---|
| Car payment | $400/month |
| Estimated mortgage payment | $1,500/month |
| Income | $5,000/month |
| DTI | 40% ($2,000/$5,000) |
In the above scenario, you’d likely qualify for an FHA loan despite your student loan debt.
Does student loan repayment status affect your FHA loan?
Yes, your repayment status can impact your ability to get an FHA loan. If your loan is in default — meaning you haven’t made a payment on it for at least 270 days, then you’ll be unable to get an FHA loan (or any government-backed mortgage) no matter what your DTI or financial situation is.
If your loan is in deferral or forbearance, which allows you to take a pause on payments due to hardship, your lender will use 0.5% of the loan balance as your monthly student loan payment when calculating your DTI.
How FHA Calculates Monthly Student Loan Payments
With FHA loans, though, at least as of 2021, lenders will use either 0.5% of the loan balance (so half the amount of other loan programs) or the payment actually listed on the borrower’s credit report. This can make it easier for many student loan borrowers to qualify, particularly those who are one of the federal government’s many flexible repayment plans.
How to Qualify for FHA Loans with High Student Debt
If you’re worried about qualifying for an FHA loan because of your student loan debt, the best thing you can do is find ways to reduce your monthly payment. If you have federal student loans, get on an income-based repayment plan, or if your loans are private, consider refinancing or consolidating them. This could help you get a lower interest rate and, thus, reduce your monthly payment.
Reducing other debts, such as those on your car or credit cards, will also decrease your monthly debt obligations and lower your total DTI.
Dan Bartelt has over 16 years of mortgage industry experience. He’s held roles as a loan officer and processor and has spent the past 8 years as an underwriter. Dan views underwriting as solving a puzzle—piecing together details to create a compelling loan story.
