FHA Guidelines Versus Overlays On FHA Home Loans

This Article On FHA Guidelines Versus Overlays On FHA Home Loans Was PUBLISHED On July 10th, 2019

There have been some notable changes for FHA Guidelines where it may affect home buyers.

One of the most notable changes to HUD Guidelines is that deferred student loans are now counted in the calculations of the borrower’s debt to income ratios
This holds true 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

In this article, we will discuss FHA Guidelines Versus Overlays On FHA Home Loans.

FHA Guidelines Versus Overlays On Student Loans

FHA Guidelines on deferred student loans no longer allow that deferred student loan payment to 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 1% 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 1% of the $100,000 or $1,000 per month will be used as a monthly student loan payment
This holds true if their student loans are in deferment and they cannot get a monthly minimum student loan payment from their student loan provider

Borrowers with high student loan balances may need to go with Conventional Loans. Fannie Mae and Freddie Mac allow Income-Based Repayment (IBR PAYMENTS) to be used on Conventional Loans. The maximum debt to income ratios on Conventional Loans is capped at 50% DTI to get an approve/eligible per AUS.

FHA Guidelines Versus Overlays 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 Lenders will most likely require a minimum credit score of 680 FICO
USDA programs will require a credit score of 580 FICO
FHA has one of the most lenient credit score requirements out of all mortgage loan programs

Qualifying for a 3.5% down payment home purchase FHA Loan the borrower needs a minimum of a 580 credit score. Borrowers with credit scores between 500 and 579 FICO credit scores can qualify for FHA Loans. However, 10% down payment will be required.

Updated FHA Guidelines On Non-Occupant Co-Borrowers

HUD allows 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 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, stepbrothers and stepsisters, step-parents, and aunt and uncles
Some 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
If Non-occupant co-borrowers are not related to the main borrower by law, marriage, blood, then HUD requires the home buyer to put 25% down payment

There are no limits on the amount of non-occupant co-borrowers an FHA borrower may add to the main borrower.

Updated FHA Guidelines Versus Overlays On Debt To Income Ratios

HUD Guidelines on debt to income ratios are as follows:

If the borrower has credit scores lower than 620 FICO, then the maximum debt to income ratios allowed is no greater than 43% DTI to get an approve/eligible per automated underwriting system
With credit scores higher than 620 FICO, the 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
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.
For borrowers with higher debt to income ratios, they can always add non-occupant co-borrowers to qualify for an 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

FHA Guidelines Versus Overlays On Manual Underwriting

Manual Underwriting is when a regular is downgraded to a manual underwrite:

This is 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
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

A 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.

FHA Guidelines Versus Overlays On Collection Accounts

HUD does not require borrowers to 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 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 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 as a monthly debt

This holds true even though the borrower does not have to pay this amount. It will count towards the debt to income ratio calculations by the mortgage underwriter.

FHA Guidelines Versus Overlays On Charge Off Accounts

Charge Offs accounts do not matter and do not count under Updated FHA Guidelines Versus Overlays.

Most charge off accounts reflects a balance on the borrower’s credit report
That balance reporting on the borrower’s credit report does not matter
Unlike non-medical collection accounts, there is 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

FHA Guidelines Versus Overlays On Mortgage-Related Charged Off Accounts

With mortgage-related charge off accounts, there is a three year waiting period from the date of the mortgage charged off account in order to qualify for an 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 an 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 lenders will tell you that having a mortgage charge off is fine
You can qualify for an 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
This is 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 an FHA Loan.

FHA Guidelines Versus Overlays 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 loans
There is no mandatory waiting period after timeshare foreclosures to qualify for an FHA Loan
Unfortunately, many home buyers who had prior timeshare foreclosures are still being told by some loan officers that they do not qualify for an FHA Loan
This is due to them having a prior timeshare foreclosure
This is not the case

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 an 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 are 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 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
Credit disputes on derogatory tradelines that are 24 months or older are exempt from retraction of the disputes

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

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

In this article, we will discuss FHA Guidelines Versus Overlays.

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 a 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 and 579 FICO can qualify to purchase a home with 10% down payment

HUD 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.

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.

HUD 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 are normally used to buy down the rate of the FHA Loan by paying points

You can use sellers concessions to buy down the rate.

HUD Guidelines On FHA Loan After Bankruptcy

There are two types of bankruptcies:

Chapter 7 Bankruptcy which is a total liquidation
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 an FHA Loan.

Home Buyers can qualify for an FHA Loan one year into a Chapter 13 Bankruptcy reorganization plan with the approval of the Chapter 13 Bankruptcy Trustee
This holds true as long as they can provide documentation that they have made timely payments to all of their creditors for the past 12 months
There is no waiting period after a Chapter 13 Bankruptcy discharge to qualify for an FHA Loan

However, if the Chapter 13 Bankruptcy Discharge has not been seasoned for at least two years, it needs to be manually underwritten and manual underwriting guidelines will apply.

Lending 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 an 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 in the HUD Settlement Statement.

Updated 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:

The final outcome was a modification of their original mortgage loan agreement, often referred to as the note
There are various different types of mortgage loan modifications
The homeowner’s lender may just add the mortgage payments that were in arrears to the balance of the homeowner’s mortgage loan balance
Or the lender may reduce the mortgage rate of the current rate to make the mortgage payments more affordable
The lender can also discount the 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 an FHA Loan and no late payments in the past 12 months.

HUD Agency Guidelines Versus Mortgage Overlays

The above is a basic rundown of HUD Guidelines

Technically, if you meet all of the above requirements, there should be no reason why you cannot qualify for an FHA Loan and purchase and close on your home
Unfortunately, many lenders have something called overlays
Lender overlays 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
Any lender can set higher lending standards than those who are just set by HUD
Most banks require a 640 Credit score for borrowers although FHA’s requirement is only a 580 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 an FHA Loan due to lender overlays, contact Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com Gustan Cho Associates and the team of mortgage loan originators specialize in FHA Loans with no lender overlays. We are available 7 days a week, evenings, weekends, and holidays.