FHA Student Loan Guidelines & Income-Based Repayment [2025]

• FHA guidelines calculate student loans differently depending on repayment status (repayment, deferment, or forbearance).

• Loans in forbearance, like those on the SAVE Plan, use a placeholder calculation (0.5% of the total balance), which can inflate debt-to-income (DTI) ratios.

• The SAVE Plan litigation has placed millions of borrowers in forbearance, making this issue a major concern for home buyers with student loans.

When it comes to buying a home, student loans can feel like the biggest roadblock. FHA guidelines treat income-driven repayment plans differently, often inflating your debt-to-income (DTI) ratio and killing your chances of getting approved for a mortgage.

Take Henry Yandrasits. He thought he had everything lined up: a stable job, great credit, and no other debt. But his student loans in forbearance under the SAVE Plan pushed his DTI ratio over FHA’s limit, thanks to their placeholder calculation.

Henry’s not alone. Millions of borrowers—especially those in income-driven repayment plans or forbearance—are dealing with the same challenge.

Ahead, we’ll break down how FHA student loan guidelines impact borrowers in repayment, forbearance, or deferment, and what steps you can take to qualify for a home loan.

Related: Buying a House With $100k Student Loans

FHA guidelines, outlined in Mortgagee Letter 2021-13, set strict rules for how student loan debt factors into DTI ratios. These rules depend on whether you’re actively making payments or not.

Here’s how it works:

If you’re making payments

Lenders use the monthly student loan payment shown on your credit report or your actual payment, as long as it covers the loan amount over its full term.

Example: You owe $50,000 in federal student loans. Your income-driven repayment (IBR) plan sets your monthly payment at $200. That $200 gets used in your DTI calculation.

If you’re not making payments

Lenders calculate 0.5% of your outstanding student loan balance as your monthly obligation. This applies whether your loans are in forbearance, deferment, or you’re on an IBR plan with $0 payments.

Example: You owe $100,000 in student loans but aren’t actively making payments. FHA guidelines treat this as a $500 monthly obligation in your DTI, which can make it harder to meet FHA eligibility requirements.

For borrowers in income-driven repayment plans, this rule can create frustrating situations. Imagine a physician who qualified for $0 payments during residency in his income-based repayment plan but now earns significantly more as an attending. Even though their monthly payment amount is $0, FHA guidelines still calculate 0.5% of their loan balance, inflating their DTI ratio.

The same goes for deferred student loans.

Even if you’re not required to make payments, FHA lenders still count 0.5% of your balance. For someone with $60,000 in student loans, that’s an extra $300 added to their DTI—enough to disqualify many prospective homeowners.

Related: Does An Income Driven Repayment Plan Affect My Mortage Application?

Before 2021, FHA guidelines required mortgage lenders to calculate 1% of your total loan balance for DTI ratios if you weren’t making payments. This overstated borrowers’ obligations and locked many out of homeownership.

HUD Secretary Marcia Fudge led the push to cut this placeholder calculation to 0.5%, citing its unfair impact on first-time buyers and borrowers of color.

“For too long, the 1% rule made it harder for these borrowers to buy a home,” Fudge explained. “By reducing it to 0.5%, we’re creating more equitable access to homeownership.”

This change helped millions of borrowers. For someone with $100,000 in student loans, it cut their calculated monthly obligation from $1,000 to $500 under the new guidelines—a significant improvement.

But the placeholder rule is still a barrier for borrowers in forbearance or deferment. Even at 0.5%, it doesn’t reflect actual repayment terms, leaving many struggling to qualify for an FHA home loan

If your student loans are in forbearance, FHA guidelines don’t go easy on you. Instead of treating paused loans as temporarily inactive, FHA rules require lenders to calculate a placeholder payment of 0.5% of your total student loan balance when determining your debt-to-income (DTI) ratio.

This approach inflates your monthly debt on paper, even if you aren’t making payments.

What This Means for You

Here’s how the 0.5% rule affects borrowers:

• Higher DTI Ratios: If your student loans are paused, lenders still include 0.5% of your loan balance as a monthly obligation. For example, $80,000 in loans means $400 added to your DTI ratio, potentially putting you over the FHA’s 50% DTI limit.

• Misleading Financial Picture: The placeholder payment doesn’t reflect your actual financial situation. If your forbearance is due to temporary hardship or pending loan forgiveness, the 0.5% rule still assumes your debt is unmanageable.

• No Exceptions: FHA rules treat all forbearance situations the same, whether your loans are paused voluntarily or because of something like the SAVE Plan litigation.

Why This Matters

For borrowers with high student loan balances, this rigid calculation can block you from FHA loan program eligibility, even if you can easily afford a mortgage. And because FHA loans are popular among first-time buyers, the placeholder rule disproportionately impacts those already facing other financial challenges.

The Bigger Issue

Forbearance is supposed to provide relief, not create roadblocks. Yet FHA guidelines treat paused loans like an ongoing financial burden, making it harder for borrowers to qualify for the FHA’s flexible mortgage programs.

If you’re in this situation, you’ll need to strategize with your mortgage lender to overcome these hurdles. In the next section, we’ll dive into how the SAVE Plan litigation is making this even more complicated.

Millions of borrowers are stuck in limbo because of the SAVE Plan litigation. Designed to lower monthly payments for federal student loan borrowers, the SAVE Plan hit a roadblock when lawsuits challenged the Biden administration’s authority to implement it.

As a result, 8 million borrowers have had their loans placed in forbearance while the courts decide the plan’s fate. This forbearance status triggers FHA’s 0.5% placeholder rule, inflating monthly obligations on paper and pushing many borrowers’ DTI ratios over FHA’s 50% limit.

The Real Impact

Borrowers like Henry Yandrasits are feeling the effects firsthand. Without a payment schedule showing an actual monthly student loan payment, FHA mortgage lenders can’t move forward with underwriting. For borrowers considering refinancing or purchasing a single-family home, these inflated obligations present serious challenges.

This situation highlights a frustrating disconnect between student loan policies and real estate goals. Borrowers are left with inflated DTI ratios that don’t reflect their actual repayment terms, all because of litigation that has nothing to do with their ability to pay.

If your student loans are affecting your ability to qualify for an FHA loan, there are steps you can take to improve your chances.

1. Switch Out of Forbearance

If your loans are paused because of the SAVE Plan litigation or another reason, consider switching to a repayment plan like extended or graduated repayment. This gives you a defined monthly student loan payment that lenders can use in your DTI calculation.

Example: Let’s say you owe $80,000 in student debt. In forbearance, FHA rules calculate a placeholder payment of $400 (0.5% of the balance). Switching to an extended repayment plan might reduce that to $200 a month, cutting your DTI ratio and making it easier to qualify.

2. Run the Numbers

Before switching plans, calculate how the new monthly payment will affect your DTI ratio. Make sure you can comfortably afford the payment alongside your mortgage payment.

3. Explore Other Loan Options

If FHA guidelines are too restrictive, consider alternatives:

• Fannie Mae Loans: These often have more flexible DTI requirements for borrowers with student debt.

• USDA Loans: If you’re buying a home in an eligible rural area, USDA loans might provide an affordable option with no down payment required.

• Conventional Loans: Some lenders offer low down payment options and may use different rules for calculating student loan repayment.

4. Work Closely with Your Loan Officer

The right loan officer can make a big difference. Look for someone who understands FHA rules and can help you find creative solutions, whether it’s restructuring your student loans, adjusting repayment terms, or exploring refinancing options.

Related: Freddie Mac Student Loan Guidelines

Student loans don’t have to keep you from owning a home. FHA’s rules can feel like a roadblock, but with the right strategy, you can make progress toward your goals.

Whether it’s switching repayment plans, working with a creative lender, or exploring alternatives like Fannie Mae or USDA loans, you have options. The key is taking action now to lower your debt-to-income ratio and improve your chances of approval.

If you’re feeling stuck, we’re here to help. Book a call with a student loan expert and get a personalized plan to tackle your student loans and move closer to homeownership.