FHA Mortgage Underwriting Guidelines On Home Purchase

This BLOG On FHA Mortgage Underwriting Guidelines On Home Purchase Was Updated On October 22st, 2017

FHA Loans are the most popular loan programs in the United States.

  • HUD, The United States Department of Housing and Urban Development is the parent of FHA.
  • The Federal Housing Administration (FHA) is not a lender.
  • FHA is a government agency whose role is to guarantee FHA Lenders who originate and fund FHA Loans in the event if those FHA Loans default and go into foreclosure.
  • Due to this government guarantee, lenders can offer FHA Loans with 3,5% down payment and lower mortgage interest rates.

FHA Mortgage Underwriting Guidelines On Credit Scores

Here are the credit score requirements to qualify for FHA Loans:

  • To qualify for FHA Loans with 3.5% down payment, borrower needs at 580 middle credit score
  • Borrowers with credit scores under 579 and down to 500 can qualify for FHA Loans, however, 10% down payment is required

FHA Mortgage Underwriting Guidelines On Debt To Income Ratios

FHA has the most aggressive debt to income ratio requirements out of all mortgage loan programs.

Here are the debt to income ratio requirements on FHA Loans:

  • If borrowers have credit scores of 620 or greater, the Automated Underwriting System will render an approve/eligible if the borrower has a maximum of 46.9% front end DTI and 56.9% back end debt to income ratio
  • Borrowers debt to income ratios will be capped at 43% DTI if their credit scores are under 620
  • Mortgage rates are determined by the type of property and credit scores on FHA Loans

FHA Mortgage Underwriting Guidelines On Collections And Charge Off Accounts

Borrowers do not have to pay outstanding collections and charge off accounts to qualify for FHA Loans. However, here are the requirements and guidelines on collections and charge off accounts with FHA Loans:

  • Any collections that is non-medical and has an outstanding balance of greater than $2,000, FHA requires that mortgage underwriters take 5% of outstanding balance and use it as a monthly debt of borrower when calculating DTI
  • If outstanding non-medical collection is of higher balance, then borrower can make a written payment agreement with creditor and/or collection agency.
  • The written payment agreement executed can be used as the monthly payment of the outstanding collection account in lieu of the 5% of the outstanding balance
  • Charged off accounts and/or accounts that is labeled and reported as profit and loss on credit report are exempt from taking any percentage in the use of DTI Calculations
  • Medical collection account balances are exempt from the 5% rule no matter how much the outstanding balance is

FHA Mortgage Underwriting Guidelines On Credit Disputes

Credit Disputes are not allowed during the mortgage process with the exception of the following:

  • Medical Disputes: Medical disputes are allowed
  • Non-Medical Disputes with zero balances are allowed
  • Non-Medical disputes under $1,000 in total outstanding balances are exempt from credit disputes
  • Charge off accounts and late payment credit disputes are not allowed during mortgage process

FHA Mortgage Underwriting Guidelines On Bankruptcy And Foreclosure

The following are waiting period requirement after Bankruptcy and Foreclosure in qualifying for FHA Loans:

  • 2 year waiting period after Chapter 7 Bankruptcy discharged date
  • Borrowers in an active Chapter 13 Bankruptcy repayment plan can qualify for FHA Loans one year into a Chapter 13 Repayment plan with trustee approval. No need to worry about Trustee approval. Most Trustees will approve home loans one year into a Chapter 13 Bankruptcy Repayment Period
  • There is no waiting period after Chapter 13 Bankruptcy discharged date with The Gustan Cho Team at USA Mortgage
  • However, both FHA Loan programs during and after Chapter 13 Bankruptcy discharge (if Chapter 13 Bankruptcy discharged date has not been discharged for two years) needs to be manually underwritten
  • FHA requires three year waiting period after short sale
  • FHA requires three year waiting period after recorded date of foreclosure and/or foreclosure or date of sheriff’s sale

FHA Mortgage Underwriting Guidelines On Late Payments After Bankruptcy And Foreclosure

Most mortgage lenders will not approve borrowers who had late payments after the following:

  • Chapter 7 Bankruptcy discharge
  • During and/or After Chapter 13 Bankruptcy
  • After Loan Modification
  • After Foreclosure
  • After Deed In Lieu Of Foreclosure
  • After Short Sale

However, late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, short sale is not a HUD Guideline. As long as the borrower can get an approve/eligible per Automated Underwriting System Findings, The Gustan Cho Team at USA Mortgage can approve and close on the FHA Loans. We have no lender overlays on government and conventional loans and are direct lenders licensed in multiple states.

FHA Mortgage Underwriting Guidelines On Property Flipping

Property flipping is a practice whereby a recently acquired property is resold for a considerable profit to a home buyer. These type transactions are allowed if the property is fully disclosed. The property cannot be misrepresented . The property cannot be artificially inflated. To avoid illegal property flipping and protect the home buyer, FHA has implemented and launched new FHA Mortgage Underwriting Guidelines On Property Flipping.

Here are the basic general HUD Guidelines On Property Flipping:

  • FHA Requires that only owners of record may sell homes that will be financed by home buyers with FHA Loans
  • Any re-sale of a property cannot happen 90 days or fewer days from the last sale of the subject property to be eligible for FHA insured financing
  • For property sales that occurs between 91 days to 180 days, if the new price of the property surpasses the previous sales price by 100% or greater, HUD requires additional documentation needed to validate the justification of the markup.

Sale Of Property By Owner Of Record

Under FHA Mortgage Underwriting Guidelines on property flipping, FHA considers the re-sale date of the property as the date of the executed sales contract by the home buyer. The property must be purchased by the property owner of record. The real estate transaction cannot involve any sale or assignment of the real estate sales contract. This applies to any and all FHA purchases regardless of the timeliness of sales and re-sales.

Documentation and proof that verifies the seller is the owner of record needs to be provided as follows:

  • Property report showing history of owners
  • Recorded deed from the home seller
  • Other documentation necessary such as property tax bill, title commitment that shows and documents sellers proof of ownership of the subject property and the date that it was acquired

Exemption Of 90 Day Restriction For FHA Mortgage Underwriting Guidelines

There are certain exemptions of the 90 day restriction for FHA Mortgage Underwriting Guidelines On Property Flips:

  • Homes that are sold by HUD from the inventory of REO Properties owned by HUD
  • Homes that were HUD Real Estate Owned Properties and then rehabbed and resold are not eligible under this exemption
  • Home sales of home that was inherited by the sellers through inheritance
  • Home sales of homes that are purchased by employers or relocation companies in connection with employee relocations
  • Home sold by state and federally chartered financial agencies and GSE (Government Sponsored Enterprises)
  • Properties sold of properties that has been foreclosed by state licensed mortgage companies
  • Any company that sells properties that has been foreclosed on behalf of an exempt mortgage lender
  • Properties sold by local and state government agencies

FHA 203K Loans

FHA 203k Loans is an acquisition and construction loan offered by The Gustan Cho Team at USA Mortgage. There are no additional requirements in qualifying for FHA 203k Loans versus standard FHA Loans.

  • 580 Credit Scores
  • 3.5% down payment on the after repaired value required
  • Sellers concessions of up to 6% is allowed by sellers to cover home buyers closing costs

Mortgage borrowers who need to get qualified by a direct lender with no lender overlays on government and/or conventional loans, please contact The Gustan Cho Team at USA Mortgage at 1-800-900-8569 or text us at 262-716-8151. Or email us at gcho@usa-mortgage.com. We are available 7 days a week, evenings, weekends, and holidays.

Gustan Cho NMLS ID # 873293

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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