This article covers Changes In FHA Guidelines For First Time Home Buyers
The Federal Housing Administration is in charge of setting FHA mortgage lending guidelines. Changes In FHA Guidelines are common and just because FHA guidelines are set does not mean those guidelines are good forever. There are times when changes in FHA Guidelines happen multiple times a year so mortgage loan originators need to make sure they are on top of the latest rules and regulations. The United States Department of Housing and Urban Development, HUD, is the parent of the Federal Housing Administration, FHA. FHA is not a mortgage lender and does not originate nor fund FHA Loans. FHA’s mission is to insure FHA Loans originated by private FHA approved mortgage lenders such as banks and mortgage companies and in the event of the borrower defaulting on their FHA Loans, FHA will insure the FHA Loan as long as each FHA Loan that the FHA approved mortgage lender originated and funded meet FHA mortgage lending guidelines.
Changes In FHA Guidelines On Student Loans
One of the most important changes in FHA Guidelines is with student loans.
- Under the old HUD Guidelines on student loans, FHA would permit that student loan payment that has been deferred for at least one year can be excluded in the calculation of the borrower’s debt to income ratios
- Under the new changes in FHA Guidelines on student loans is that mortgage underwriters need to count the monthly student loan payments no matter what, even if the student loan payments are deferred
FHA requires that 1.0% of the outstanding student loan balance debt be used as a hypothetical monthly debt when mortgage underwriters calculate debt to income ratios.
Tricks In Lowering Student Loan Payments
One of the great news about the new FHA Guidelines is borrowers with outstanding high student loan balances can have their student loans lowered by doing the following:
- contact student loan provider
- tell them they are applying for a mortgage
- tell them lender want a hypothetical monthly student loan payment that is fully amortized over an extended term
- the longest extended term is normally 25 years
- this payment can be used in lieu of 1.0% of the outstanding student loan balance and it normally turns out to be 0.50%
It needs to be in writing.
Using Income-Based Repayment On Conventional Loans
Conventional Loans allows restructured student loans to an income-based payment plan which will most likely reduce the monthly student loan payments but not FHA:
- Income-Based Repayment (IBR) is allowed with Fannie Mae and/or Freddie Mac on Conventional Loans including zero payment IBR
- Needs to report on all three credit bureaus
If it does not report on credit bureaus, the loan officer can do credit supplement/rapid rescore.
Changes In FHA Guidelines For Installment Debts Less Than 10 Months
Under the old HUD mortgage lending guidelines, any installment debts that have less than 10 months left may be excluded from the calculation of the borrower’s debt to income ratios.
- However, this rule has changed with the new FHA Guidelines
- Payments with less than 10 months left may ONLY BE EXCLUDED IF AND ONLY IF they have the cumulative payment are less than or equal to 5% of borrower’s gross monthly income
The borrower cannot pay down the debts to achieve this figure.
Changes In FHA Guidelines With FHA Streamline Refinance
Under the old mortgage guidelines with FHA Streamline Refinance Mortgage Loans, borrowers needed to have a net tangible benefit of savings of at least 5% off the principal and interest and mortgage insurance payment.
- For example, on a monthly $900 principal and interest monthly mortgage payment and a $150 monthly FHA insurance payment, the total housing payment is $1,050
- 5% of the $1,050 is equivalent to $52.50
The $52.50 per month is the minimum amount of monthly payment borrower needs to save in order to trigger the FHA Streamline Refinance Mortgage Loan and for borrowers to qualify for the FHA Streamline Refinance.
FHA Streamline Refinance Mortgage Guidelines
With the new FHA Guidelines, borrowers need to have a minimum savings of half of one percent, 0.50%, of their current interest rate, and FHA mortgage insurance premium.
- For example, if the borrower has a current interest rate of 4.5% and the borrower’s FHA mortgage insurance premium is 1.35%, the total is cumulative is 5.85%
- The new loan needs to be at least 0.50% lower between the two figures
- For example, if the new mortgage rate is 4.0% and the new mortgage insurance premium is 0.85%, the cumulative total is 4.85%
- The combined savings is 1.0% and how we derive to this is by subtracting the 4.85% from 5.85%
- This would qualify under the new FHA Guidelines with FHA Streamline Mortgage Loans
- With this example, the FHA Streamline Borrower would even qualify with a mortgage interest rate of 4.5% due to the reduction of mortgage insurance premium to 0.85%
- Due to the Reduction Of FHA Mortgage Insurance Premium, this borrower would qualify with a mortgage interest rate of 4.5%
- Borrowers will still qualify for an FHA Streamline Refinance Mortgage Loan
- This borrower can save money even by refinancing their FHA Loan with the same mortgage rate they have
This is due to the reduction of the mortgage insurance premium with the new Streamline Mortgage Refinance Loan.
Changes In FHA Guidelines With Regards To Multiple FHA Loans
Under the old Guidelines, a home buyer can qualify for a second FHA Loan if they had a job transfer if the new home that they are buying is closer to their place of employment.
- However, with the new changes with FHA Guidelines with multiple FHA Loans, if the home buyer needs a second FHA Loan due to employment relocation purposes, the commuting distance between the old home and the new home must be at least 100 miles.
FHA Guidelines With Regards To Non-Taxable Income
Grossing up on social security and non-taxable income is allowed using tax rate evidenced on the most recent tax returns.
- In the event, if the mortgage loan borrower did not file tax returns, you can gross up non-taxable income up to 25%
- Under the new FHA Guidelines with non-taxable income, the non-taxable income can be grossed up by using the greater of 15% or the borrower’s actual tax rate
In the event, if the borrower did not file tax returns, then the gross-up rate of 15% is used.
HUD Guidelines On Manual Underwriting
The old FHA mortgage lending guidelines on manual underwriting with regards to credit history was totally up to mortgage underwriting discretion.
- New FHA lending guidelines with manual underwriting with regards to credit history is for the underwriter to review the payment history of the borrower
- The underwriter needs to review all mortgage and installment debt payments have been paid on time for the past 12 months
- Cannot have not more than two 30 day late payments on their mortgage or installment debt payments in the past 24 months
- The mortgage underwriter can give the borrower a mortgage loan approval if the borrower has an acceptable payment history and has no major negative credit tradelines on revolving credit accounts in the past 12 months
- Major negative derogatory credit accounts on revolving credit accounts are credit accounts that are 90 days or more late after the payment due date or three or more credit tradelines that are at least 60 days late after the payment due date
- All borrowers must write a detailed letter of explanation and document the reasons why they have outstanding collection accounts
Letter of explanation for the reason for late payments as well as all other derogatory credit items such as judgments, tax liens, and charge offs if it is applicable.
FHA Guidelines Excluding Business Debt
Under the old mortgage lending guidelines, FHA allowed business debts, such as car payments, to be excluded from the calculation of debt to income ratios.
- For example, if the borrower had a car titled under their name but paid with their business account and can show twelve months canceled checks of the funds to pay car payments were coming out of their business account, then the car payment can be excluded from debt to income calculations
- Under the new guidelines, all business debt needs to be included in the calculation of borrower’s debt to income ratios
- This holds true unless the borrower can provide proof that the business is actually responsible for the monthly debt payments
In order for mortgage underwriters to be able to accept proof that the business is responsible for the debt payment, the debt item needs to be in the business cash flow as well as business tax returns on reflecting the debt.
June 12, 2020 - 6 min read