This ARTICLE On FHA Mortgage Requirements And Guidelines On FHA Home Loans Was UPDATED And PUBLISHED On September 5th, 2019
There have been several changes to FHA Mortgage Requirements since the launch of the HUD 4000.1 FHA Handbook released last September 14, 2015.
FHA loans are the most popular mortgage loan program today for home buyers due to the lenient mortgage lending guidelines with regards to the following:
- credit scores
- credit history
- collection accounts
- charge off accounts
- gift funds for the down payment
- the waiting period after bankruptcy and foreclosure
- non-occupant co-borrower requirements
- debt to income ratio requirements
In this article, we will cover and discuss FHA Mortgage Requirements And Guidelines On FHA Home Loans.
Benefits Of FHA Loans
Mortgage rates on FHA loans are one of the lowest out of all mortgage loan programs.
- This is since FHA Loans are insured by the Federal Housing Administration against the 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 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
- Homebuyers only need a 580 credit score to qualify for a 3.5% down payment FHA home purchase loan
- Homebuyers with credit scores between 500 and 579 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 credit scores and higher
Debt to income ratio requirements for the borrower with under 620 credit scores is capped at 43% DTI to get an approve/eligible per AUS.
FHA Mortgage Requirements On Collections Accounts
Many hard-working Americans have run into credit issues at one time or another due to the following:
- loss of employment
- 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
FHA does NOT require collection accounts to be paid off or charge off accounts to be paid off in order for borrowers to qualify for FHA Loans.
FHA Mortgage Requirements On Outstanding Collections And Charged Off Accounts
FHA classifies collection accounts into three different categories:
- Non-Medical Collections Accounts
- Medical Collection Accounts
- Charge Off Accounts
Non-Medical Versus Medical Collections
With non-medical collection accounts, FHA mortgage borrowers do not have to pay off non-medical collection accounts in order to qualify for an 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
This is used to calculate the borrower’s debt to income ratios even though the borrower does not have to pay anything every month.
For example, let’s take a case scenario:
- if the FHA mortgage loan borrower has five non-medical collection accounts
- 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
- This is a hypothetical payment even though the borrower does not have to pay a penny
This hypothetical monthly payment is used to calculate the borrower’s debt to income ratios.
Outstanding Collections And How It Affects DTI
If the outstanding non-medical collection balance is large and the 5% calculation will disqualify the borrower, borrowers can enter into a written payment agreement with the collection agency and/or creditor:
- Whatever is agreed upon in 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 are no seasoning requirements on written payment agreements
- The day the written payment agreement is executed with the creditor is the day it is effective and in force
- If the 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
- This is due to 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.
FHA Mortgage Requirements On Credit Disputes
There are strict FHA Mortgage Requirements on credit disputes.
- Borrowers 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, let’s take a case scenario:
- have six non-medical collection accounts
- each of $200 unpaid outstanding collection balances
- $200 dollars times six collection accounts total $1,200
- So the aggregate balance is over $1,000
- Those credit disputes need to be removed off the credit report in order for borrowers to qualify for an FHA Loan
Negative Impact When Retracting Credit Disputes
One thing that will affect borrowers in retracting credit disputes is that it will lower credit scores when they retract credit disputes:
- Credit disputes on non-medical collection accounts with zero balances is exempt
- Borrowers can have credit disputes on non-medical collection accounts that are zero balance
- Cannot have any credit disputes on charge off accounts, late payments, or other derogatory credit items
- Credit disputes on medical collection accounts are exempt
Borrowers are allowed to have credit disputes on medical collection accounts no matter how much the outstanding unpaid medical collection balance is.
FHA Mortgage 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 have 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
- 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 lender will use 1% of the outstanding student loan balance as a monthly expense in calculating the borrower’s debt to income ratios.
Get Amortized Monthly Payment Over Extended Term On Student Loans
Lenders will take 1.0% of the outstanding balance of student loans as part of borrowers debt to income ratio calculations.
However, borrowers with larger student loan balances need to contact the student loan provider and request the following:
- Tell student loan customer service rep that you are applying for a mortgage
- The lender asked to get a fully monthly amortized monthly payment over an extended-term (normally 25 years)
- This needs to be in writing
- This figure normally turns out to be 050% of the student loan balance
Borrowers can use 0.50% versus the 1.0% of the student loan balance if they use this technique.
Conventional Loan Requirements On Student Loans
Borrowers with larger outstanding student loan balances may need to go with conventional loans. Fannie Mae and Freddie Mac allow Income-Based Repayment (IBR). The Team at Gustan Cho Associates are very creative and we can see if we can structure the loan to make it conventional so the larger student loan balance does not disqualify borrowers from qualifying.
If you are a home buyer and need to get qualified for an FHA insured mortgage loan and need an FHA Lender with no lender overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org. We are available 7 days a week to take phone calls or answer emails and answer and questions you may have on FHA Loans.