FHA loan issue..what's next?

Question

After a year of saving up money to buy my first mulit unit property to house hack I take the step to go to a mortgage firm for the second time to see if the amount I originally qualified for would go up any as I am paying less in student loans. I'm told that FHA changed some regulations and it now accounts 1% of my student loan ($400/month). Even though I'm on an income driven repayment play it doesn't matter. So now I can only qualify for a very little amount. What are some creative options I have? I have to move in the next few months and don't want to waste the money I've saved on renting an apartment.

Andrew Postell · Answer

@Kayla Grau this could absolutely be a lender "overlay". An overlay is an extra rule that a lender puts on top of the FHA loan rules to be more conservative on their lending. Some lenders have lots of overlays and some have none. The actual rule here concerning Student loans is "if the payment used for the monthly obligation is less than 1 percent of the outstanding balance report on the credit report and/or less than the monthly payment reported on the credit report then the mortgagee must obtain written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor." Essentially, if you can prove that your payment is what you say it is then a lender WITH NO OVERLAYS should use that documented payment. The initial bank you spoke with may not even train their employees on overlays so they could be completely oblivious that there are other rules out there. Find a lender with no overlays and you will find the most flexible loan you can find.And just in case, if your student loans are deferred more than 12 months they do not have to be held against you for lending purposes on a FHA loan.@Nathan Gogo the 1% rule is that if your credit report doesn't show a payment or if your loans are deferred for 12 months or less then 1% of the balance will be held against you for qualifying purposes. So if you owe $1,000 in student loans, then the payment they will hold against you is $10. Hope this helps!

Dan Schwartz · Answer

If HUD issued the guidelines (these are usually available in their website's archive), this isn't an overlay. Also, I disagree with waiting to retire student loan debt prior to investing. If it's possible to get the loan - and it might not be - the incremental increase to one's monthly cash flow could have a very positive effect on the paydown of the student loan balance. Being on an income-based repayment plan suggests that the borrower will be making payments for 20-30 years in total; that time would be well-spent making prudent investments, increasing monthly cash flow, and growing net worth. Unfortunately, the nature of student loans today makes them more analogous to having a mortgage than the quasi-car loan (in rate, term, and principal amount) we were able to walk away with 20 years ago. Having one mortgage shouldn't deter someone from investing, as long as he or she can do so wisely and safely, and nor should having a student loan balance. Good luck!

Blair F. · Answer

Kayla Grau hi Kayla. I am currently house hacking so I can tell you that it has been a great decision. I can also tell you that there have been unexpected costly repairs, remodels, tenant vacancy etc that have come up, I have been able to manage them because I been in good financial position. You will not like my opinion. I think if you are on income based repayment with your student loans that would mean that you didn't think you could handle the regular monthly payment. And if that is the case I think need to wait to buy a house. Work your butt off, live for as cheap as possible and pay off that debt. I speak from experience that you will be and feel free when you are done with it. Then think about house hacking. Good luck :)

Nathan Gogo · Answer

What do you mean by accounts 1% of your student loan?

Christopher Phillips · Answer

@Kayla GrauYou are correct. Early last year HUD issued the new guidelines to calculate student loan debt. It is the greater of either 1% of the outstanding balance or the reported monthly payment on the borrower's credit report.So, deferring student loans to be able to get an FHA loan will no longer happen.What you can do is go in with a co-borrower/partner/parent that will increase your borrowing power.