Updated 2016 FHA Guidelines

Changes In 2016 FHA Guidelines

There have been some notable changes for 2016 FHA Guidelines where it may affect home buyers. One of the most notable changes to 2016 FHA Guidelines is that deferred student loans are now counted in the calculations of the borrower’s debt to income ratios even if the student loans have been deferred for 12 or more months. Before this change in deferred student loans, all deferred student loans that have been deferred by the student loan provider for at least 12 months could have been excluded from debt to income ratio calculations. 2016 FHA Guidelines on deferred student loans no longer allow that deferred student loan payment be exempt from debt to income ratio calculations. The borrower needs to either get what the monthly student loan payments will be after the student loan deferment period is over or if the student loan provider cannot provide the monthly payment amount, then 2% of the aggregate student loan balance will be used as a monthly payment.  Those who have advanced degrees such as attorneys and doctors and have student loan balances like $100,000, then 2% of the $100,000 or $2,000 per month will be used as a monthly student loan payment if their student loans are in deferment and they cannot get a monthly minimum student loan payment from their student loan provider.

2016 FHA Guidelines On Credit Scores

Credit Scores play a major role when it comes to qualifying for a mortgage loan. All mortgage loan programs will have minimum credit score requirements. For example, Fannie Mae and Freddie Mac require a minimum 620 FICO credit score to qualify for a Conventional Loan. Jumbo Mortgage Lenders will most likely require a minimum credit score of 680 FICO while USDA programs will require a credit score of 640 FICO. FHA has one of the most lenient credit score requirements out of all mortgage loan programs.

2016 FHA Guidelines in qualifying for a 3.5% down payment home purchase FHA Loan is the borrower to meet a minimum of a 580 FICO credit score. Borrowers with credit scores between 500 FICO and 579 FICO credit scores can qualify for FHA Loans, however, 10% down payment will be required.

Updated 2016 FHA Guidelines On Non-Occupant Co-Borrowers

FHA allows FHA mortgage borrowers to add non-occupant co-borrowers on their mortgage loan in order to qualify for income. The non-occupant co-borrowers need to be related to the mortgage loan borrower by blood, law, or marriage. Acceptable non-occupant co-borrowers include parents, brothers and sisters, parents in laws, brother and sister in laws, grandparents, grandparents in law, step brothers and step sisters, step parents, and aunt and uncles. Some mortgage lenders are more strict with the actual relationship of the non-occupant co-borrowers to the main borrower while others are more lax about it and just take the word of the mortgage loan applicant. There are no limits on the amount of non-occupant co-borrowers a FHA borrower may add to the main borrower.

Updated 2016 FHA Guidelines On Debt To Income Ratios

2016 Updated 2016 FHA Guidelines on debt to income ratios are as follows:

  1. If the borrower has credit scores lower than 620 FICO, then the maximum debt to income ratios allowed is no greater than 43% DTI.
  2. If the borrower has credit scores higher than 620 FICO, the borrower can have a maximum front end debt to income ratio of up to 46.9% front end DTI and a maximum of 56.9% DTI on the back end debt to income ratios.
  3. Debt to income ratios on manual underwriting loans are up to underwriter’s discretion and can go higher than 50% DTI as long as the borrower has compensating factors.
  4. For borrowers with higher debt to income ratios, they can always add non-occupant co-borrowers to qualify for a FHA Loan and/or pay down their debts where it will eliminate their monthly debt payments so they are in line with the proper FHA Guidelines On Debt To Income Ratios.

Updated 2016 FHA Guidelines On Manual Underwriting

Manual Underwriting is when a regular is downgraded to a manual underwrite due to certain circumstances or when the Automated Underwriting System cannot render an approve/eligible per DU FINDINGS and/or LP FINDINGS and gets a referred/eligible automated findings. Manual Underwrites do require rental verification as well as compensating factors to get a FHA mortgage loan approval. Compensating factors are positive factors that a borrower has that a mortgage underwriter will take into consideration. For example, a larger down payment will be considered compensating factors as well as reserves. Part time job that a borrower has but is not being used to qualify for income in the debt to income ratio calculations will also be considered a strong compensating factor.

Updated 2016 FHA Guidelines On Collection Accounts

FHA does not require that FHA mortgage borrowers pay off any outstanding unpaid collection accounts.  Medical collections are exempt from any portion of the outstanding unpaid collection balance in being calculated for the debt to income ratios of the FHA mortgage borrower. However, with non-medical collection accounts with outstanding unpaid collection account balances that total more than $2,000, then 5% of the outstanding unpaid collection balance will be used to calculate the FHA mortgage loan borrower’s debt to income ratios. For example, if the borrower has an aggregate outstanding unpaid collection balance of $10,000 from all of his collection accounts, the borrower does not have to pay this, however, 5% of the $10,000 or $500 will be counted like a monthly debt, even though the borrower does not have to pay this amount, and will count towards the debt to income ratio calculations by the mortgage underwriter .

Updated 2016 FHA Guidelines On Charge Off Accounts

Charge Offs accounts do not matter and do not count under 2016 Updated FHA Guidelines. Most charge off accounts reflect a balance on the borrower’s credit report and that balance reporting on the borrower’s credit report does not matter. Unlike non-medical collection accounts, there are no mandatory percentage that is taken out of the outstanding unpaid collection account balance and used as a monthly payment. This FHA Guidelines on charge off accounts are for non-mortgage related charge off accounts.

With mortgage related charge off accounts, there is a three year waiting period from the date of the mortgage charge off account in order to qualify for a FHA Loan. This FHA Guidelines On Mortgage Charge Off Accounts counts for first mortgages and second mortgages. The three year waiting period to qualify for a FHA Loan after either a first or second mortgage charge offs is three years from the date of the mortgage charge off account that is reflected on the consumer’s credit report. Many mortgage lenders will tell you that having a mortgage charge off is fine and you can qualify for a FHA Loans three years after a mortgage charge off on your credit report, however, there cannot be any balance on the credit report. These mortgage loan officers do not know what they are talking about because most charge off accounts, whether they are mortgage charge offs and/or regular charge off accounts reflect an outstanding unpaid collection balance on the consumer’s credit report. The mortgage charge off balance on the borrower’s credit report has no impact on them qualifying for a FHA Loan.

Updated 2016 FHA Guidelines On Timeshare Foreclosures

Timeshares were extremely popular prior to the 2008 Real Estate And Mortgage Meltdown , however, due to the Great Recession of 2008, many timeshare property owners had to go through foreclosures. Timeshares are not considered mortgage loans under FHA and are consumer consumer loans. There are no mandatory waiting period after timeshare foreclosures to qualify for a FHA Loan. Unfortunately, many home buyers who had prior timeshare foreclosures are still being told by some mortgage brokers and loan officers that they do not qualify for a FHA Loan due to them having a prior timeshare foreclosure. This is not the case.

Updated 2016 FHA Guidelines On Credit Disputes

You cannot have any credit disputes on non medical collection accounts with outstanding unpaid balances that total $1,000 or greater to qualify for a FHA Loan.  Many consumers do credit disputes in the hopes of deleting derogatory and inaccurate information their credit reports. However, having credit disputes on non-medical collection accounts with outstanding balances is not allowed.

You cannot also have credit disputes on charge off accounts, no matter what the balance is. Credit disputes on non-medical collection accounts with outstanding balances greater than $1,000 and credit disputes on charge off accounts will automatically halt the mortgage approval process until the credit disputes have been retracted. You can have credit disputes on non-medical collection accounts that have zero balances.

You are allowed to have credit disputes on medical collection accounts, no matter how much the outstanding unpaid collection balance is.

Mortgage loan borrowers need to understand that if you retract credit disputes, your credit scores will definitely drop. Mortgage loan originators should not issue pre-approval letters unless they have thoroughly carefully reviewed the mortgage borrower’s credit report and make sure that there are no credit disputes on non-medical collection accounts as well as charge off accounts.

Updated 2016 FHA Guidelines On Down Payment

Two things home buyers will need a down payment on a home purchase and will also have closing costs on a home purchase. The Federal Housing Administration, or FHA, is part of the United States Department of Housing Urban Development, also known by many as HUD. FHA allows hard working American families the opportunity to become homeowner by putting down as little as 3.5% down payment on a home purchase. A home buyer with at least a 580 FICO Credit Score can qualify to purchase a home with as little as 3.5% down and lenient credit qualification requirements. Home buyers with credit scores between 500 FICO and 579 FICO can qualify to purchase a home with 10% down payment.

FHA also allows for home buyers who do not have their own down payment to get gift funds from a family member for their down payment. 100% of the 3.5% required can be gifted by a family member and can be used for the home buyer’s down payment.

Updated 2016 FHA Guidelines On Sellers Concessions

Home buyers who only have the down payment and cannot come up with the closing costs on a home purchase can get their closing costs covered by the home seller through a sellers concession. FHA allows for home sellers to cover part or all of the home buyer’s closing costs by offering the home buyer sellers concessions up to 6%.  The maximum allowed for sellers concessions is 6%. Any overage in sellers concessions needs to go back to the home seller and cannot be kicked back to the home buyer. It is key that sellers concessions not be wasted. Any overages in sellers concessions is normally used to buy down the rate of the FHA Loan by paying points.  You can use sellers concessions to buy down the rate.

Updated 2016 FHA Guidelines On FHA Loan After Bankruptcy

There are two types of bankruptcies: Chapter 7 Bankruptcy which is total liquidation and Chapter 13 Bankruptcy, which is the restructuring of the debts of the petitioner. There is a 2 year mandatory waiting period after the discharge date of a Chapter 7 Bankruptcy to qualify for a FHA Loan. Home Buyers can qualify for a FHA Loan one year into a Chapter 13 Bankruptcy reorganization plan with the approval of the Chapter 13 Bankruptcy Trustee and as long as they can provide documentation that they have made timely payments to all of their creditors for the past 12 months.

There are no waiting period after a Chapter 13 Bankruptcy discharge to qualify for a FHA Loan. However, if the Chapter 13 Bankruptcy Discharge has not been seasoned for at least two years, then the FHA Loan will need to be manually underwritten and manual underwriting guidelines will apply.

Updated 2016 FHA Guidelines On FHA Loan After Foreclosure, Deed In Lieu Of Foreclosure, Short Sale

There is a three year mandatory waiting period to qualify for a FHA Loan after the date of the sheriff’s sale and/or the date the deed of the property has been transferred out of the homeowners name and into the name of the lender and/or new home buyer after a foreclosure and/or deed in lieu of foreclosure. There is a three year mandatory waiting period to qualify for a FHA Loan after a short sale. The start date of the waiting period starts from the date of the sale of the short sale which is reflected on the HUD Settlement Statement.

Updated 2016 FHA Guidelines On FHA Loan After Loan Modification

A mortgage loan modification is when a homeowner has restructured their home loan with their lender due to extenuating circumstances where the final outcome was a modification of their original mortgage loan agreement, often referred as the note. There are various different types of mortgage loan modifications. The homeowner’s mortgage lender may just add the mortgage payments that were in arrears to the balance of the homeowner’s mortgage loan balance. Or the mortgage lender may reduce the mortgage rate of the current mortgage rate to make the mortgage payments more affordable. The mortgage lender can also discount the mortgage loan balance due to the property being upside down, or underwater, therefore reducing the monthly P.I.T.I. Or, the mortgage lender may do a combination and/or all of the above.

There is a mandatory one year waiting period after a loan modification to qualify for a FHA Loan and no late payments in the past 12 months.

2016 FHA Guidelines Versus Mortgage Overlays

The above is a basic run down of 2016 FHA Guidelines and technically, if you meet all of the above requirements, there should be no reason why you cannot qualify for a FHA Loan and purchase and close on your home. Unfortunately, many mortgage lenders have something called mortgage overlays, which are lending guidelines that are set by their own financial institution that set higher standards than the minimum FHA Guidelines. This is not against the law and any FHA approved mortgage lender can set higher lending standards than those who are just set by FHA. Most banks require a 640 FICO credit score for FHA mortgage borrowers although FHA’s requirement is only a 580 FICO credit score for a 3.5% down payment home purchase loan. Most banks will not approve a borrower with outstanding unpaid collection accounts, including medical collection accounts and charge off accounts, where FHA does not require the borrower to pay off outstanding unpaid collection accounts.

If you are told that you do not qualify for a FHA Loan due to mortgage lender overlays, contact Gustan Cho Associates at 262-716-8151 or email us at gcho@gustancho.com.  Gustan Cho and his team of mortgage loan originators specialize in FHA Loans with no mortgage lender overlays and are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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