Guidelines for Student Loans When Qualifying for an FHA Loan

FHA home loans

The Federal Housing Administration (FHA) has high credit standards. While borrowers may be granted a loan guarantee despite low income or a low down payment, they are expected to have excellent credit. The credit requirements include a good borrowing history, a low amount of debt and responsible record of paying any federal loans or fees in the past. Your borrowing history on student debts will factor into each of these areas.

Background

The FHA is a specific mortgage-assistance arm of the Department of Housing and Urban Development. The FHA's mission is to make mortgages more affordable. It does this by guaranteeing loans from private lenders, giving them added assurance against risk. The FHA does not, contrary to some misconceptions, help out bad-credit borrowers. It instead seeks responsible borrowers who need help lowering a down payment or keeping interest rates low. You do not need a high salary to qualify for an FHA loan, but you do need a high credit rating.

History

Your credit history is a primary factor in whether you receive an FHA loan guarantee. In particular, the FHA will review your borrowing history on installment loans. Your installment loan history is important because a mortgage is an installment loan; it is one large sum of money paid back in specific monthly payments. A student loan is also an installment loan. So, if you have borrowed and paid off a large sum in your student loan, you will have a positive borrowing history. If you missed payments, defaulted, refinanced or otherwise did not pay your student loan on time within the past five years, the FHA may not approve your application.

Ratios

If you are still paying off your student debt, the limit you can receive for an FHA loan guarantee may be affected. The FHA considers your income in comparison with your total debts to determine how large a mortgage you can afford. Therefore, if you have a student loan payment of $500 per month, the FHA will reduce your available monthly income by $500 a month, thus lowering your mortgage by a proportionate amount. It is best to have a student loan make up no more than 10 percent of your monthly income at the time you apply for your mortgage loan.

Considerations

Your student loan will be particularly scrutinized if it is from the U.S. Department of Education. The FHA will not approve a loan guarantee to any borrower who is currently in default on a federal loan or fee. If you have a federal student loan, make sure all of your payments have been on time and in full for at least two years before seeking an FHA loan guarantee. If you have defaulted on a federal student loan in the past, wait at least five years before applying for an FHA loan.

References

• HUD: Let FHA Loans Help You