2016 FHA Loan Requirements

2016 FHA Loan Requirements Explained

There have been several changes to 2016 FHA Loan Requirements since the launch of the HUD 4000.1 FHA Handbook released last September 14, 2015. FHA is the most popular mortgage loan program today for home buyers due to the lenient mortgage lending guidelines with regards to credit scores, credit history, collection accounts, charge off accounts, gift funds for down payment, waiting period after bankruptcy and foreclosure, non-occupant co-borrower requirements, and debt to income ratio requirements. Mortgage rates on FHA Loans are one of the lowest out of all mortgage loan programs since FHA Loans are insured by the Federal Housing Administration against borrower defaulting on their FHA Loan. The Federal Housing Administration, FHA, is not a mortgage lender. FHA Loans are originated and funded by banks and mortgage companies who are FHA approved and as long as they follow FHA mortgage lending guidelines on all of the FHA Loans they originate and fund, the FHA Loan will be insured by the United States Department of Housing and Urban Development, which is commonly known as HUD, which is the parent of the Federal Housing Administration or FHA. Home buyers only need a 580 FICO credit score to qualify for a 3.5% down payment FHA home purchase loan. Home buyers with credit scores between 500 FICO and 579 FICO can also qualify for FHA Loans, however, a 10% down payment on a home purchase is required for FHA Borrowers with credit scores of under 580 credit scores. Debt to income ratio requirements on FHA Loans is 56.9% DTI for mortgage borrowers who have credit scores of 620 FICO credit scores and higher and debt to income ratio requirements for borrower with under 620 FICO credit scores is capped at 43% DTI.

2016 FHA Loan Requirements On Collections Accounts

Many hard working Americans have run into credit issues at one time or another due to unemployment, loss of employment, divorce, medical issues, or other extenuating circumstances where they had a disruption of their household income where it affected their credit. Some folks could not pay their bills for an extended period of time and their creditors turned their accounts to collection accounts status or charged off the account. FHA realizes that consumers could run into periods of bad credit and FHA does require collection accounts to be paid off or charge off accounts to be paid off in order for a FHA mortgage loan borrower to qualify for a FHA Loan. FHA classifies collection accounts into three different categories:

  1. Non-Medical Collections Accounts
  2. Medical Collection Accounts
  3. Charge Off Accounts

With non-medical collection accounts, FHA mortgage borrowers do not have to pay off non-medical collection accounts in order to qualify for a FHA insured mortgage loan. However, if the borrower has a total sum of over $2,000 from all of their creditors that are considered non-medical collection accounts, then 5% of the outstanding non-medical collection account balance is taken into consideration and used to calculate the FHA borrower’s debt to income ratios even though the FHA borrower does not have to pay anything every month. For example, if the FHA mortgage loan borrower has five non-medical collection accounts and the total outstanding unpaid balance of the collection accounts is $10,000, then 5% of the $10,000 will be used as part of the borrower’s monthly debt payments even though the borrower does not have to pay a penny and will be used to calculated the borrower’s debt to income ratios. If the outstanding non-medical collection balance is large and the 5% calculation will disqualify the FHA mortgage loan borrower, the FHA borrower can enter into a written payment agreement with the collection agency and/or creditor and whatever is agreed upon on the written payment agreement will be used as a monthly debt payment in lieu of the 5% of the outstanding non-medical collection account balance. There is no seasoning requirements on written payment agreements and the day the written payment agreement is executed with the creditor is the day the it is effective and in force. If the FHA borrower were to default on their written payment agreement with the collection agency and/or creditor after the closing of their FHA Loan, that would not matter or affect his FHA Loan since the mortgage lender nor FHA has no control over the borrower after the FHA Loan has closed.

Medical collections and charge off accounts are exempt from debt to income ratio calculations no matter what the outstanding balance is.

2016 FHA Loan Requirements: Credit Disputes

There are strict 2016 FHA Loan Requirements on credit disputes. You cannot have any credit disputes on charge off accounts or any non-medical collection accounts with total aggregate outstanding balances that is greater of $1,000. For example, if you have six non-medical collection accounts with each of $200 unpaid outstanding collection balances, $200 dollars times six collection accounts total $1,200 so the aggregate balance is over $1,000 so those credit disputes needs to be removed off your credit report in order for you to qualify for a FHA Loan. One thing that will affect you in retracting your credit disputes is that it will lower your credit scores when you retract your credit disputes. Credit disputes on non-medical collection accounts with zero balances is exempt and you can have credit disputes on non-medical collection accounts that are zero balance. You cannot have any credit disputes on charge off accounts. Credit disputes on medical collection accounts are exempt and you are allowed to have credit disputes on medical collection accounts no matter how much the outstanding unpaid medical collection balance is.

2016 FHA Loan Requirements On Deferred Student Loans

As of September 14, 2015, all student loans that are deferred does not matter and is no longer exempt from debt to income ratio calculations on FHA Loans. Before September 14, 2015, all deferred student loans that has been deferred for longer than 12 months were exempt from debt to income ratio calculations on FHA Loans but that is no longer the case with the New HUD 4000.1 FHA Handbook. FHA Borrowers with deferred student loans need to get a set monthly payment amount in writing from the student loan provider when the student loan is out of deferment. If the borrower cannot provide a monthly payment statement once the student loan is out of deferment, then the mortgage lender will use 2% of the outstanding student loan balance as a monthly expense in calculating the borrower’s debt to income ratios.

If you are a home buyer and need to get qualified for a FHA insured mortgage loan and need a FHA Lender with no lender overlays, please contact me at 262-716-8151 or email me at gcho@gustancho.com. We are available 7 days a week to take your phone calls or answer your emails and answer and questions you may have on FHA Loans.

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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