Why the FHA Won't Approve With a Student Loan
Many people pay for their homes by taking out mortgage loans. Some people, however, do not qualify for conventional home loans because of their income. The Federal Housing Administration provides low-interest home loans to people with lower incomes. FHA loan programs are a specific type of federal assistance. People who have a student loan typically don't qualify for the loan program.
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Debt to Income Requirements
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Although the FHA wants to get deserving people into as many homes as possible, they do not want to make your low-income situation worse by letting you take on more debt than you can handle. For this reason, the FHA has specific regulations about the debt to income ratio you can have and still qualify. Under FHA regulations, you cannot apply if the mortgage payment expenses divided by your gross monthly income is higher than 29 percent. You also can't apply if your total fixed payments (including the mortgage and all other debt) divided by your monthly gross income is higher than 49 percent. Student loans often give applicants debt to income ratios that are too high to meet these requirements.
Credit Requirements
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The FHA considers your credit in addition to your debts and income. Denise Richardson on the Give Me Back My Credit website says approximately seven percent of people who entered the student loan repayment process in 2008 had defaulted as of 2010. Richardson points out that this is comparable to the default rate on mortgages and credit cards. However, the FHA takes a greater chance by lending to low-income individuals. To minimize the chances of default, the FHA is intolerant of debt delinquency. The FHA states that "borrowers who are delinquent on any federal debt, such as tax liens, student loans, etc., are not eligible." The FHA does allow for some short-term debt, with short-term debt defined as debt you can repay in 10 months.
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Accommodating Your Student Loan Debt
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If you can't get an FHA loan because of your student loans, one alternative is to consolidate your debt so you pay off the remainder of the student loan balance. You also could tap into the equity you have in other assets to pay the student loan off. This gets you to the point where you can show the FHA that you aren't delinquent on a federal loan. The FHA will see that you owe Consolidation Company A, not the Department of Education. This option can be difficult, however, because you need credit decent enough to qualify for the consolidation loan. Additionally, consolidation doesn't decrease your debt-to-income ratio. If you didn't qualify with the student loan because it put you over the debt-to-income limits, you still won't qualify even if you consolidate.
Lenders
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The FHA is not a lender. When people talk about FHA loans, they refer to loans given by general lenders; the FHA simply insures these general home loans in case you default. Lenders are able to give you low interest rates because of this extra backing. If you have a student loan, you may be able to find an FHA-approved lender you like and take out a mortgage outside of the FHA program. Later, when you've paid off your student loan, you can refinance your mortgage through the same lender with an FHA loan. As long as you have made payments consistently, your odds of qualifying for an FHA refinance mortgage loan through the same lender will be good, because you'll have established a history with that lender.
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References
- Federal Housing Administration: FHA Requirements: Debt Ratios Comparing Your Debt to Your Income
- Federal Housing Administration: FHA Requirements: Credit Guidelines
- Give Me Back My Credit: Shocking Statistics for U.S. Student Loan Default in 2010
- U.S. Department of Housing and Urban Development: 100 Questions & Answers About Buying A New Home
- Photo Credit single family home image by Karin Lau from Fotolia.com
