2 Ways FHA Counts Your Student Loan, and Neither One Is Zero
Two ways. That is how FHA counts your student loan when it calculates your debt, and neither one is zero. If your credit report shows a zero payment and you assume the loan will not count against you, this is worth five minutes before you start house hunting.
Meet Aria and her zero
Aria is a fictional first-time buyer near Whiteville, NC. She is an illustration of a situation that comes up often, not a real client. Her student loans show a zero payment on her credit report. Because the payment reads zero, she assumes the loans will not count when a lender calculates her debt.
That is a very natural thing to think. The credit report says zero, so it feels like the debt has been set aside. With FHA, that is not how the math works.
What the FHA guideline says
The guideline is direct. It says: "The Mortgagee must include all Student Loans in the Borrower's liabilities, regardless of the payment type or status of payments." The Mortgagee is the lender. Regardless of payment type or status means a loan in deferment, in forbearance, or showing a zero payment is still part of the picture.
Then it tells the lender which number to use: "For outstanding Student Loans, regardless of payment status, the Mortgagee must use: the payment amount reported on the credit report or the actual documented payment, when the payment amount is above zero; or 0.5 percent of the outstanding loan balance, when the monthly payment reported on the Borrower's credit report is zero."
The two ways, in plain words
Way one: the credit report shows a payment above zero. The lender uses the payment amount reported on the credit report, or the actual documented payment.
Way two: the credit report shows a zero payment. The lender uses 0.5 percent of the outstanding loan balance. In plain math, that means taking the balance and multiplying it by 0.005.
Neither way produces a zero. That is the whole point. A zero on the report does not mean zero in the debt calculation.
Why Aria should care before she shops
The number a lender counts as a monthly obligation is part of how your overall debt is measured. If you do not know which student loan number is in that calculation, you are planning around a figure you have not seen. It is much better to learn this at the start than to be surprised partway through a purchase.
I am not going to guess at how much it changes any one buyer's picture. That depends on the balance and the rest of the file. What I can say is that Aria should know the number first.
The question Aria should ask
Here is exactly what I would have her say to the loan officer: "For my student loans, which number are you using in my debt calculation: the payment on my credit report, or 0.5 percent of the outstanding balance? Please show me where it appears on the worksheet."
It is a short question, and it works because it asks for a specific answer and for proof. A loan officer who is using the right number will be able to point to it.
Then compare the paperwork
Next, Aria should request the lender's credit report and her current student loan statement. Then she should compare both documents to the number used. Does the payment on the lender's credit report match what is in the calculation? Does the balance on her statement line up with what the lender is working from? If something does not match, she can raise it early, while there is time to sort it out.
If this sounds like you
Maybe your loans are in deferment or forbearance. Maybe your report shows a zero payment. Either way, you are considering FHA and you want to know what number a lender will actually use. That is a conversation I am glad to have.
I am Jason Sharon, a licensed mortgage broker, and my job is to find the path. Call me at 843-LOW-RATE and we will look at your student loans together.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: 2 Ways FHA Counts Your Student Loan, and Neither One Is Zero
