FHA Rules for Student Loans & Co-Signed Debt: The Uncensored Truth

Under FHA guidelines, Student Loans are treated differently than standard installment loans. The Mortgagee must include all Student Loans in the Borrower's liabilities, regardless of the payment type or status of payments. You cannot simply ignore them because they are in deferment.

Calculation of the Monthly Obligation

When calculating your Debt-to-Income (DTI) ratio, the FHA utilizes a very specific formula for outstanding student loans. The Mortgagee must use:

• The Documented Payment: The payment amount reported on the credit report or the actual documented payment from the servicer, when the payment amount is above zero.
• The 0.5% Rule: 0.5 percent of the outstanding loan balance, when the monthly payment reported on the Borrower's credit report is zero (such as when the loan is in deferment or forbearance).

Forgiven or Discharged Loans

The Mortgagee may completely exclude the payment amount from the monthly debt calculation if written documentation from the student loan program, creditor, or servicer indicates that the loan balance has been formally forgiven, canceled, discharged, or otherwise paid in full.

COVID-19 Exception: Where a student loan payment has been suspended in accordance with COVID-19 emergency relief, the Mortgagee may use the payment amount reported on the credit report or the actual documented payment prior to suspension, provided that payment amount is above $0.

A Contingent Liability is a liability that may result in the obligation to repay only where a specific event occurs. For example, a contingent liability exists when an individual can be held responsible for the repayment of a debt if another legally obligated party defaults on the payment. The most common form of this is a co-signed auto loan.

The 12-Month Exclusion Rule

By default, FHA includes monthly payments on contingent liabilities in the calculation of the Borrower's monthly expenses. However, you can legally exclude this debt from your DTI ratio.

The Mortgagee can exclude the debt if we verify that there is no possibility that the debt holder will pursue debt collection against the Borrower should the other party default, or the other legally obligated party has made 12 months of timely payments.

Required Documentation for Exclusion

To completely wipe the co-signed debt from your FHA qualifying ratios, we must obtain documentation to evidence that the other party to the debt has been making regular, on-time payments during the previous 12 months. This is typically proven by providing 12 months of canceled checks or bank statements from the other party's account showing the debt being paid.

Many borrowers are added as an "Authorized User" to a parent's or spouse's credit card to help build their credit score. While this helps your score, it also adds that card's monthly payment to your debt ratio.

How to Exclude Authorized User Debt

Accounts for which the Borrower is an authorized user must be included in a Borrower's DTI ratio unless the Mortgagee can document that the primary account holder has made all required payments on the account for the previous 12 months. If less than three payments have been required on the account in the previous 12 months, the payment amount must be included in the Borrower's DTI.