FHA Mortgage Guidelines

FHA Mortgage Guidelines

FHA Mortgage Guidelines Explained

FHA Loans are the most popular mortgage loan program in the United States. The United States Department of Housing and Urban Development, HUD, is the parent of FHA.

Under the new HUD FHA Handbook 4000,1, which is the most recent FHA Mortgage Guidelines, FHA will permit borrowers with credit scores north of 620 FICO a maximum of 46.9% DTI front end debt to income ratios, which is called the housing ratios, and the maximum debt to income ratio is 56.9% DTI on the back end debt to income ratio.

First time home buyers as well as home buyers with prior bad credit, a prior bankruptcy, a prior foreclosure, a prior deed in lieu, and a prior short sale can qualify for FHA loans. There are mandatory waiting periods after bankruptcy and foreclosure to qualify for FHA Loans.

Qualifying For FHA Loans After Bankruptcy And Foreclosure

There are minimum waiting period to qualify for FHA Loans per FHA Loan Guidelines, after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale. For traditional FHA loan programs, there is a mandatory 2 year waiting period after the discharge date of a bankruptcy.  There is a mandatory 3 year waiting period after a foreclosure, deed in lieu of foreclosure, and short sale to qualify for the traditional FHA loan program.  The waiting period clock starts from the recorded date of the foreclosure that is reflected on public records and not the date where the keys were surrendered to the lender or the date of the sheriff’s sale. The three year waiting period after a short sale starts on the date of the short sale which is reflected on the HUD-1 Settlement Statement date. Those who have lost a job through involuntary termination and/or a company shutdown and due to this had to file bankruptcy or had to go through a foreclosure, deed in lieu of foreclosure, or short sale can qualify for the new FHA Back to Work Extenuating Circumstances due to an economic event mortgage loan program  in just one year after the bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale, waiving the traditional waiting period.

FHA Mortgage Guidelines On Collection Accounts

You can qualify for a FHA Loan with prior bad credit.  You can qualify for a FHA Loan with unpaid collection accounts, charge offs, and even judgments.  FHA does not require you to pay off your old collection accounts in order for you to get a FHA loan approval and close on your mortgage loan.  There are many mortgage lenders that have mortgage lender overlays which are a set of the lenders own guidelines that is on top of FHA minimum mortgage lending guidelines and most do require that unpaid collections be paid off prior to closing because they are afraid of the collection agency pursuing judgment proceedings.  Gustan Cho represents mortgage lenders with no lender overlays and just goes off the minimum FHA Loan Guidelines and the automated approval.  If FHA says no collections need to be paid off,  no collection accounts need to be paid off.

FHA Mortgage Guidelines On Medical Collections

FHA does not count unpaid medical collection accounts.  Medical collections are exempt and you can have a high balance of unpaid medical collection accounts.  With non-medical collection accounts, you do not have to pay off any unpaid collection balance, however, if the total of unpaid collection balance is greater than $1,000, FHA will count 5% of the unpaid collection balance as a monthly debt obligation and will count it towards calculating your debt to income ratios even though you do not pay anything.  This can become a problem if your unpaid collection balance is of a larger amount.  For example, if you have a $20,000 unpaid total collection balance, 5% of the $20,000, or $1,000, will be counted as a monthly debt obligation and will be used to calculate your debt to income ratio.  This can be a deal killer if you already have higher debt to income ratios.  FHA does allow for you to enter into a written payment agreement with the creditor and what ever you agree to mutually, that will be used by the mortgage loan underwriter as your monthly debt.  For example, on the $20,000 unpaid credit balance, if you and the creditor agreed on a monthly payment of $200.00 per month, then the $200.00 per month will be used as your monthly debt payment on that collection account instead of $1,000.00.  There is no payment seasoning requirement with this rule.

FHA Mortgage Guidelines On High Debt To Income Ratios

Conventional mortgage loan borrowers who have high debt to income ratios can turn to FHA loans to qualify if they do not meet conventional debt to income guidelines.  Maximum debt to income ratios for conventional loans is capped at 45% DTI.  FHA is much more generous with debt to income ratios.  FHA caps their back end debt to income ratios at 56.9%.  FHA loans have a front end debt to income ratio cap of 46.9% DTI.  FHA loans is a phenomenal mortgage loan program for first time home buyers, home buyers with bad credit and low credit scores, self employed buyers, and home buyers who have high debt to income ratios.

Non-Occupant Co-Borrowers

Another advantage of FHA Loans is that if the main borrower has little or no income documentation, FHA permits the borrower to add a non-occupant co-borrower for income qualification purposes.  The non-occupant co-borrower needs to be related to the main borrower by marriage, blood, or law.  Special exceptions may be made if the non-occupant co-borrower has been close friends to the main borrower for at least 5 or more years.

Gift funds And Sellers Concessions

FHA allows the home buyer to get 100% gift funds to be used for the down payment and/or closing costs.  Gift funds needs to come from a relative of the home buyer and a gift letter needs to be signed by the donor stating that the funds is only a gift and is not a loan and does not have to be paid back to the donor.

FHA allows up to a 6% sellers concessions towards a home buyers closing costs.  However, the closing costs cannot be wasted so make sure you do not get excess sellers concessions where you cannot apply it to your closing cost.  In the event if there is an overage in sellers concessions, it needs to go back to the home seller.