Are Student Loans Counted in Ratio for FHA Home Loan Guidelines?
When you apply for a loan guarantee from the Federal Housing Administration (FHA), your total debt profile will be considered. The total amount you can receive is determined by a ratio of your income to your debt. If you owe too much to another lender, such as your student lender, you will not be eligible for a loan. Even if you qualify with an outstanding student debt, it will affect your limit.
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Background
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The FHA insures mortgage loans; it does not make them directly. With an FHA "guarantee," you can qualify for a lower down payment and fixed interest rate. To qualify, however, you must have good credit. Further, the FHA will not guarantee a loan you cannot afford.
Function
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The function of an FHA loan is to protect the lender from taking on too much risk. The FHA promises to repay the debt if you, the borrower, cannot. Because the FHA is taking on a risk anytime it guarantees a loan, it is a relatively conservative organization. An FHA loan guarantee is for a smaller amount than you would receive on a conventional mortgage not guaranteed by the FHA.
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Formulas
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To determine how much it will lend, the FHA uses two formulas. The first is called the "front end ratio." This ratio is your gross income divided by your new mortgage payment. The standard percentage on the front end ratio is 29 percent. Most borrowers have other debts beyond a mortgage, however, and this is where they FHA uses a "back end ratio." The back end ratio is your gross income divided by all of your debt obligations. Here, the standard guideline is around 40 percent, but you may exceed this in some cases.
Application
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If you have a student loan, it is counted toward your back end ratio. Other debts counted in this ratio include car loans, credit card payments, personal loans, tax liens, alimony and other obligations. If your student debt is high, you may exceed the 40 percent guideline on the back end. In this case, you will have to pay down some of your student or other debts before qualifying for an FHA guarantee.
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Resources
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