FHA Loans: HUD Mortgage Guidelines To Qualify For FHA Home Loans:HUD Mortgage Guidelines On FHA Loans 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 HUD Loan Guidelines, after a bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale.
- For traditional FHA loans, there is a mandatory 2 year waiting period after the discharge date of Chapter 7 bankruptcy discharged
- There is a mandatory 3 year waiting period after a foreclosure, deed in lieu of foreclosure, and short sale.
- The waiting period clock starts from the recorded date of the foreclosure and/or date of the deed in lieu of foreclosure that is reflected on public records
- Or the date of the sheriff’s sale
- The waiting period start date is not the date where the keys were surrendered to the lender
- 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
Gustan Cho Associates offers non-QM loans where homebuyers can qualify for a mortgage one day out of bankruptcy and/or foreclosure with 30% down payment.
HUD Mortgage Guidelines On Collection Accounts On FHA Loans
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
- HUD, the parent of FHA, does not require you to pay off your old collection accounts in order for you to get a loan approval and close on your mortgage loan
- There are many lenders that have lender overlays
- Lender overlays are the lender’s own guidelines that is above and beyond the minimum lending guidelines of FHA
- Most lenders do require unpaid collections be paid off prior to closing
- The reason most lenders have overlays on collections and/or charged-off accounts is because they are afraid of collection agencies may pursue judgment proceedings
- Gustan Cho Associates is affiliated with wholesale partner lenders with no overlays
- We only go off the minimum HUD Agency Guidelines
- All we go off are the findings of the automated underwriting system (AUS) and have zero lender overlays
If FHA says no collections need to be paid off, no collection accounts need to be paid off.
HUD Mortgage Guidelines On Medical Collections
FHA does not count unpaid medical collection accounts.
- Medical collections and charged-off accounts (whether medical and/or non-medical) are exempt from taking 5% of the outstanding collection balance and using it as a hypothetical debt when underwriters calculate debt to income ratios
- You can have a high balance of unpaid medical collection accounts and the 5% hypothetical debt is exempt
- 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 $2,000, HUD requires underwriters to take will 5% of the unpaid collection balance as a hypothetical monthly debt obligation
- The hypothetical 5% will count towards calculating the borrower’s debt to income ratios
- This holds true 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
- This hypothetical debt 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
- HUD does allow for you to enter into a written payment agreement with the creditor
- The figure you and the creditor mutually agree, that figure will be used by the mortgage 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 the monthly debt payment on that collection account versus the 5% of the $20,000 which is $1,000.00
There is no payment seasoning requirement with this rule.
HUD DTI Guidelines On FHA Loans
The maximum debt to income ratio on conventional loans is 50% to get an approve/eligible per automated underwriting system (AUS).
- There is no front end debt to income ratios on conventional loans
- Borrowers with debt to income ratios higher than 50% DTI can turn to FHA loans to qualify
- HUD is much more generous with debt to income ratios as well as approving borrowers with prior bad credit
- HUD caps their back end debt to income ratios at 56.9% to get an approve/eligible per AUS
- The maximum front end debt to income ratio cap at 46.9% DTI
- FHA loans is a phenomenal loan program for first time home buyers, homebuyers with bad credit and low credit scores, self employed buyers, and home buyers who have high debt to income ratios
Gustan Cho Associates has no lender overlays on FHA loans.
If the main borrower has little or no income documentation to qualify for a 3.5% down payment FHA loan, HUD allows 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
- HUD allows non-occupant co-borrowers who ARE NOT related to the main borrower by law, blood, and/or marriage
- However, non-family non-occupant co-borrowers need to put 25% versus a 3.5% down payment
HUD allows more than one non-occupant co-borrower to be added to the main borrower.
Gift funds And Sellers Concessions
HUD 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. 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.
HUD 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.