Federal housing administration mortgages can help you purchase a home even if you haven't been able to save up for a large down payment. Though having student loans does not automatically disqualify you from being approved for an FHA loan, it will affect your application. Knowing its impact ahead of time helps you narrow the range of homes you can afford.
Higher Outstanding Debt
When you apply for an FHA mortgage, the lender looks at your entire credit profile to determine whether to issue the loan and, if so, what interest rate to charge. Included in your credit history is how much you owe and how you've handled your debt -- and this includes your student loans. If you have significant outstanding loans, lenders will view you as a more risky borrower because of your existing debts and will charge you a higher interest rate or not be willing to lend as much money. In fact, they might not be willing to give you the loan at all, even if you have a high income.
Deferred Loans Count
Just because your student loans are deferred doesn't mean lenders won't consider them when you apply for an FHA mortgage. Deferment means that you are legitimately delaying making payments -- you are not paying them currently. However, they still count as outstanding debt, and your lender must anticipate how much of your monthly income you'll have to put toward paying off the loans as soon as the payments begin.
The back-end ratio, also known as the debt-to-income ratio, measures your total debt payments -- including your anticipated monthly mortgage expenses, student loan payments, and any other debt -- as a percentage of your monthly income. FHA lenders typically do not accept a back-end ratio higher than 41 percent. For example, if your monthly gross income is $3,500, you're limited to $1,435 total monthly debt. If you have a $400 student loan payment every month and no other debt, your mortgage payment can be no more than $1,035.
Federal Student Loans
In order to be eligible for an FHA loan, you can't be delinquent on any federal debts. If you took out federal student loans, such as Stafford loans or Perkins loans, you must have been making on-time payments for at least two years prior to applying for the FHA mortgage in order to qualify. If you have fallen behind on your payments, you won't be eligible for an FHA loan.
- Bankrate.com: 7 Things to Know About an FHA Loan
- FinWeb: FHA Student Loan Requirements
- FHA.com: FHA Requirements: Credit Guidelines
- Kentucky USDA RHS Rural Housing Mortgage Loans: Deferred Student Loans and Debt Ratio Calculations
- FHA Home Loans: FHA Debt Ratio's Guidelines
- Real Estate.com: Home Much Home Can I Afford?
- Money Zine: Debt to Income Ratio
Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."