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FHA removes 1% rule for student loans

FHA Removes 1% Rule to Qualify for a Mortgage with Student Loans

The Problem with the FHA 1% Rule

In 2015, new guidelines were introduced for calculating your student loan payment for the purposes of qualifying for a home mortgage loan.

These new rules were designed to address the payments for student loans that are deferred, in forbearance, or in a repayment plan that does not fully pay the student loan balance at the end of a fixed repayment term.

We have been following these ever-changing guidelines since 2015, which you can find here – 2021 Guide to Qualifying for a Mortgage with Student Loans.

The most egregious of these new underwriting guidelines were introduced by FHA.

Simply put, if your loan is not in a repayment plan that will completely pay off your student loan at the end of a fixed-term (fully amortized payment) you have to use the 1% rule.

The 1% rule is when the underwriter uses 1% of your student loan balance as a “payment” when calculating your debt to income ratios.

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Here’s an example of how the 1% rule worked in the past:

  • Your student loan balance is $100,000
  • You’re on an Income-Based Repayment plan (IBR, IDR, ICR, PAYE, REPAYE)
  • The underwriter will calculate 1% of your balance and use $1,000 as a “debt” payment

In most cases, the 1% rule all but eliminated FHA as an option for homebuyers and homeowners.

FHA Removes 1% Rule June 17th, 2021

The new FHA student loan calculation guidelines released by HUD (Department of Housing and Urban Development) on June 17th, 2021 removes the 1% rule and put FHA student loan guidelines in line with Conventional underwriting guidelines.

When Can I Use the New Guidelines?

These guidelines are effective for all FHA loans (case numbers assigned) on or after August 16th, 2021, however, lenders can begin following the new guidelines now.

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New Calculation of Monthly Obligation

For outstanding Student Loans, regardless of payment status, the underwriter 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

These calculations are more in line with Freddie Mac’s conventional guidelines which also require you to use .5% if your payment is $0.00.

Fannie Mae’s conventional underwriting guidelines will allow you to use a zero $0.00 payment as long as the loan is in a repayment plan.

How to Prove Your Payment – Documentation Requirements

If the payment used for the monthly obligation is less than the monthly payment reported on your credit report, you will have to provide your lender with written documentation of the actual monthly payment, the payment status, and evidence of the outstanding balance and terms from the creditor or student loan servicer.

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The lender may exclude the payment completely from your monthly debt to income calculation if you have written documentation from the student loan program, creditor, or student loan servicer indicates that the loan balance has been forgiven, canceled, discharged, or otherwise paid in full.

FHA Mortgage Declined Because of Student Loans?

The incredible burden of the 1% rule pushed many homebuyers and homeowners out of the market over the past 6 years.  If you are one of those people, it’s time to try again!

Will All Lenders Remove the 1% Rule?

We get this question a lot. Do all lenders require the 1% rule?

The answer is that the lender chooses whether or not to follow the underwriting guidelines for the type of mortgage you are applying for.

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Fannie Mae, Freddie Mac, FHA, VA & USDA offer guidelines, which are minimum requirements to qualify for the loan program.

Individual lenders have the freedom to add “overlays” or restrictions to these guidelines.  Many lenders do this.

Between lender overlays and inexperienced loan officers, you will often get 5 different answers if you call 5 different lenders.

What these lenders and inexperienced loan officers are failing to tell you is that THEY do not follow (or don’t know) the guidelines and that another lender that does follow the guidelines could help you.

Find a Student Loan Expert

The primary reason why we created this website is to give you an alternative to call center lenders and inexperienced loan officers that don’t always tell you the “whole story”.  You’re just a number there.

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Our goal here help you connect directly with a professional loan officer, with a broad range of expertise, that can answer your questions, help you ask the questions you’re not asking, and advise you on your options.

We have been helping home buyers and homeowners qualify for a mortgage with student loans since 2015 when the major challenges we face today were first introduced.

Find My Way Home is an Expert Network of experienced mortgage professionals, here to answer your questions, and put you on the right path.

You can get your questions answered by either giving us a little more information here, and we will match you with a loan officer who is an expert with student loan guidelines, or you can leave a comment or question below.

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We do not sell your information to multiple lenders and hope you find someone experienced, we will introduce you to one loan officer that we know and trust that can help.

Any question that you ask below, I will personally answer, and if needed, we can introduce you to a professional, experienced loan officer that I know can help.

About the Author

Scott Schang

A 20 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

Leave a Question or Comment About this Topic

  • Leisha says:

    So, if I am on IBR (also doing PSLF) and my payments are listed at $144 per month but are in forbearance due to CARES ACT, does the mortgage lender still have to use .5% of my loan (because it is in forbearance) or can they use the official amount I am supposed to pay based on IBR ($144)? Thanks!

    • Scott Schang says:

      Hi Leisha, this is a very good question. Underwriters should use your actual payment prior to it being forced into administrative forbearance (due to COVID). If your lender is telling you otherwise, find another lender. Better yet, shoot me an email at scott@findmywayhome.com and I can introduce you to a loan officer that has experience with these guidelines.

      Another option would be to call your student loan servicer and ask them to take your loan out of forbearance.

      Hope this helps?