Your Guide to Getting An FHA Loan in Houston with Student Debt

Living in Houston has advantages. Housing is affordable, there’s no state income tax, you have a low cost of living, and the food choices are fantastic.

We all know a college education is essential, but not everyone can afford it. Student loans are one way to finance college, but they can also affect your chances of getting an FHA loan and buying your new Houston home.

If you have tried applying for an FHA loan with high student loans before, it was quite a hassle and very difficult.

Now that new guidelines have been implemented, it is easier for first-time home buyers to get FHA loan approval.

Let’s look at how student loans may impact your loan application and get familiar with FHA student loan guidelines before applying for a mortgage.

What are the new FHA student loan guidelines?

In the past, those with significant student debts had difficulty qualifying for an FHA mortgage.

Borrowers often get rejected on their FHA loan because the rule states that 1% of a borrower's outstanding student loan balance is part of their debt-to-income ratio.

But in June 2021, the U.S. Department of Housing and Urban Development changed the guidelines to make it easier for first-time borrowers to become homeowners. You don’t have to jump through many hoops to get approved for home financing.

Lenders can now use the borrower's actual student loan payment based on an income-based repayment plan.

Based on the new guidelines, lenders are no longer required to calculate a homebuyer's monthly student loan payment based on 1% of the outstanding loan balance or an amortization-based payment.

In exchange, lenders are now allowed to use the following:

• .5% of the student loan balance when the reported payment status is zero

• The actual payment amount for the student loan

• The monthly student loan payment based on the credit report

If you want to learn more, you can contact a Houston mortgage broker and discuss your best options.

What are the eligibility requirements for an FHA loan?

Many homebuyers love FHA loans because they are designed for those with lower credit and have lower downpayment requirements than conventional loans.

To be eligible for an FHA loan, you must do the following:

• Have verifiable employment for the past two years

• Have a FICO score of at least 500

• Use the loan to buy a primary home

• Income must be verified through pay stubs, bank statements, and tax returns

• Have a front-end debt ratio of no more than 31% of your gross monthly income

• A back-end debt ratio of no more than 43% of your gross monthly income

• Must not have loans in CAIVRS

Houston mortgage lenders calculate your front-end debt ratio by dividing your potential monthly mortgage payments by your gross monthly income. Mortgage payments will include the principal, taxes, interest, and insurance.

The back-end ratio, on the other hand, compares your total debt (including student loans) to your income. Lenders add your monthly debt payments and housing expenses and divide the total by your gross monthly income.

To qualify for a 3.5% downpayment, you’ll need a credit score of 580 or higher. 

A steady employment history is preferred, meaning you may have to wait two years before applying for a loan if you are a new graduate.

Can you get an FHA loan with student loans in default?

The answer is No. You will be disqualified from getting an FHA mortgage if you are found delinquent or late with your student loan payments.

Student loan borrowers need to stay current on their student loan payments since the CAIVRS or Credit Alert Verification Reporting System can show lenders if they are late or in default on their student loans.

If you are found in the system, you can either apply for a loan consolidation, negotiate a settlement plan or enter a loan rehab program.

What documentation will your lender ask for?

Your credit report and other written documentation may be required when applying for a loan depending on your current financial standing.

Lenders will most likely ask for documents that show your outstanding loan balance, payment status, terms, and required monthly payments.

How can you increase your chances of qualifying for an FHA loan?

Student loan debt is normal nowadays. According to the Institute for College Acess and Success, 70% of seniors who graduated from public and nonprofit colleges in 2015 had student loan debt averaging $30,100.

Forbes even reports that student debt is now the second highest consumer debt category, higher than credit card and auto loans. 

Paying off your student loans faster will increase your chances of qualifying for an FHA loan. This will lower your DTI, which is what lenders look at during underwriting. Finding a way to increase your income or boost your savings to make extra payments on your student loans would be helpful.

You can also cut down on unnecessary expenses like vacations and frequent trips to expensive coffee shops.

Have you considered your options? You can always buy a smaller home or look for homes in more affordable areas. Who knows, you may find your dream home in a place that you never expect to see it.

An FHA mortgage calculator is a valuable tool you can find online to know how much your monthly payments would be.

Are you ready to buy your new Houston home with an FHA loan?

Buying a home is a milestone that every American dream about. High student loans may have prevented you from becoming a homeowner before, but new FHA loan guidelines have made qualifying easier. 

The recent changes will help more FHA loan borrowers with student debts qualify for a loan and also buy a home at a higher price point.

Are you excited to get started?

Work with our loan experts at Reliance Financial Group of Houston, TX. We can make your dream of becoming a homeowner come true with an FHA loan.

Schedule a meeting by calling or sending us a message today.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.