HUD 4000.1 FHA Handbook Revised For FHA Loans

HUD 4000.1 FHA Handbook Revised For FHA Loans

This BLOG On HUD 4000.1 FHA Handbook Revised For FHA Loans Was UPDATED On September 19th, 2018

HUD 4000.1 FHA Handbook Revised For FHA Loans

What Is The HUD 4000.1 FHA Handbook?

The actual HUD 4000.1 FHA Handbook is almost 900 pages. We published this blog to summarize the most important guidelines our viewers have the most questions.

FHA mortgage lending guidelines are set and implemented by the United States Department of Housing and Urban Development or HUD. HUD is the parent of the Federal Housing Administration, commonly known by many as FHA.

Every other possible case scenario on FHA Homes is listed on the HUD 4000.1 FHA Handbook

  • HUD FHA Handbook changes periodically with new FHA Guidelines
  • How often?
  • Nobody knows

FHA Guidelines Versus Mortgage Lender Overlays

FHA Guidelines Versus Mortgage Lender Overlays

Not every FHA Lenders have the same FHA Loan Requirements for their borrowers. As an example, FHA Guidelines on minimum credit score requirements for a 3.5% down payment home purchase is 580. However, most lenders do not care about the 580 credit score requirements. Many will require credit scores of 620. This is called Lender Overlays On Credit Scores.

  • All lenders need to follow the minimum lending guidelines on HUD 4000.1. FHA Handbook
  • However, most lenders have higher mortgage requirements on FHA Loans that is above and beyond the minimum HUD 4000.1 FHA Handbook
  • These higher lending requirements is called Mortgage Lender Overlays
  • The Gustan Cho Team at Loan Cabin Inc. is one of the few national lenders that have no mortgage overlays on FHA Loans
  • We just go off HUD Guidelines

Typical Lender Overlays

Typical Lender Overlays

Here are typical FHA Lender Overlays:

  • Credit Scores
    • FHA Guidelines on minimum credit scores is 580 but most require a 620
  • Debt To Income Ratio
    • FHA allows up to 46.9% front end and 56.9% back end DTI on borrowers with 620 scores and higher
    • Under 620 requires a 43% DTI
  • Outstanding Collections And Charge Offs
    • Borrowers do not have to pay outstanding charged off accounts and collections
    • Many lenders have overlays where they require borrowers to pay outstanding collections and charged off account
  • Mortgage During And After Chapter 13 Bankruptcy
    • Borrowers can qualify for FHA Home Loans During and After Chapter 13 Bankruptcy
    • Most Lenders require a two year waiting period after Chapter 13 Bankruptcy discharged date

Whatever FHA Guidelines are on HUD 4000.1 FHA Handbook, that is what we just go off.

HUD 4000.1 FHA Handbook On Changes In Student Loans

HUD 4000.1 FHA Handbook On Changes In Student Loans

The revised HUD 4000.1 FHA Handbook implemented major changes in FHA Guidelines on deferred student loans.

  • The old HUD FHA Handbook allowed deferred student loan payments from the date of closing to be excluded from the borrower’s debt to income ratio calculations 
  • Student loans that has been deferred 12 or more months was excluded from debt to income calculations under the old HUD Handbook
  • Under the new HUD 4000.1 FHA Handbook on deferred student loans, FHA underwriters need to include monthly student loan payments
  • Even if the student loan payments have been deferred for more than 12 months
  • 1.0% of the student loan balance is counted as a monthly debt on deferred student loans
  • Income Based Repayment (IBR) no longer counts with FHA Loans

Income Based Repayment (IBR) is allowed with conventional loans as long as the IBR Payment reports to all three credit bureaus.

Creative Solutions For Borrowers With Large Student Loan Balances

Creative Solutions For Borrowers With Large Student Loan Balances

In lieu of the 1.0% of the student loan balance, some lenders, like The Gustan Cho Team at Loan Cabin Inc. will take a fully amortized monthly payment over an extended term (25 years) from the student loan provider.

  • Contact the student loan provider and tell them that you are applying for mortgage and your lender needs a fully amortized monthly payment over an extended term
  • Get the verbal monthly amount and ask them to send it in writing
  • This figure normally turns out to be 0.50%
  • I have helped countless of borrowers get FHA Loans using this strategy versus taking the 1.0% of student loan balance

Exempt Debts From DTI Calculations

Exempt Debts From DTI Calculations

Under the old HUD FHA Handbook debts that had 10 months or less in monthly debt payments left could have been excluded from debt to income ratio calculations and was up to mortgage underwriter’s discretion.

  • Under the revised HUD 4000.1 FHA Handbook, installment debt payments that have 10 months or less in monthly payment left, the following applies:
    • can only be omitted from debt to income ratio calculations
    • this holds true if the total monthly payments left is equal or less than 5% of borrower’s gross monthly income
  • Borrowers cannot pre-pay the existing debt balance to accomplish this rule

HUD 4000.1 FHA Handbook Changes In FHA Streamline Refinances

HUD 4000.1 FHA Handbook Changes In FHA Streamline Refinances

Under the old HUD FHA Handbook, the rule to be able to do a FHA Streamline Refinance Mortgage, the homeowner was required to save at least 5% of the principal, interest, and FHA mortgage insurance premium payment.

  • Under the Revised New HUD 4000.1 FHA Handbook, homeowners need to have a savings of at least half of one percent, 0.50%, off their current mortgage interest rate and FHA mortgage insurance premium

FHA Loans After Timeshare Foreclosure

FHA Loans After Timeshare Foreclosure

Under HUD Guidelines, Timeshares are not real estate.

  • Timeshares are classified as installment loans
  • Under FHA Mortgage Guidelines there is no waiting period after Timeshare Foreclosure to qualify for FHA Home Loans
  • Many Lenders treat timeshare foreclosures the same as real estate property foreclosure and deny mortgage borrowers
  • I have helped countless of mortgage borrowers with timeshare foreclosures with no waiting period

FHA Guidelines During And After Chapter 13 Bankruptcy

FHA Guidelines During And After Chapter 13 Bankruptcy

Home Buyers can qualify for FHA Loans 2 years after Chapter 7 and Chapter 13 Bankruptcy discharged date.

  • Most lenders do not accept any borrowers during and after Chapter 13 Bankruptcy
  • However, under FHA Guidelines, borrowers can qualify for FHA Home Loans during Chapter 13 Bankruptcy Repayment Plan
  • 12 months needs to have passed with timely payments
  • Trustee Approval is required
  • I have never seen a case where the Chapter 13 Bankruptcy Trustee does not approve a borrower during Chapter 13 Repayment Period
  • There is no waiting period after Chapter 13 Bankruptcy discharged date
  • Any Chapter 13 Bankruptcy FHA Loans with under 2 year seasoning of the discharged date needs to be manual underwriting

This guidelines also applies to VA Loans. Veteran Borrowers can qualify for VA Home Loans during and after Chapter 13 Bankruptcy.

FHA Guidelines On Collections And Charged Off Accounts

FHA Guidelines On Collections And Charged Off Accounts

FHA Mortgage Borrowers do not have to pay outstanding collection accounts and/or charged off accounts to qualify for FHA Home Loans no matter what the outstanding balance is.

  • However, if the aggregate total of non-medical collections surpasses $2,000, then 5% of the outstanding balance is used as a monthly debt and used to calculate borrowers debt to income ratios
  • For example, if borrower has $10,000 in outstanding collections, then 5% of the $10,000 or $500 is used as a hypothetical debt and will be used to calculate DTI even though borrower does not have to pay a dime
  • If the 5% figure is too much and exceeds the debt to income ratio caps, then borrower can enter into a written payment agreement with the creditor
  • That payment agreed upon can be used as the monthly debt in lieu of the $500

Outstanding Judgments And Tax Liens

Outstanding Judgments And Tax Liens

Home Buyers can qualify for FHA Home Loans with outstanding judgments and tax liens without having to pay them off.

  • Need a written payment agreement with the judgment creditor and/or Internal Revenue Service
  • Three months of timely payments needs to have been made
  • Proof of payment needs to be provided to lender with three months of canceled checks and/or bank statements
  • Cannot prepay three months upfront to qualify for mortgage
  • Three months payment seasoning is mandatory

Guidelines On Credit Disputes

Guidelines On Credit Disputes

Credit Disputes During Mortgage Process is prohibited by HUD. All credit disputes needs to be retracted. Any mortgage loan application with credit disputes will be suspended until credit disputes are removed.

However, there are exemptions:

  • Credit Disputes on medical collections are exempt from retraction
  • Any credit disputes on non-medical collections with zero balances are exempt from retraction
  • If the total balance of all non-medical credit disputes equals less than $1,000, it is exempt from retracting it

HUD 4000.1 FHA Handbook Changes With FHA Borrowers With More Than On FHA Loan

HUD 4000.1 FHA Handbook Changes With FHA Borrowers With More Than On FHA Loan

HUD allows borrowers to have more than one FHA Loan if they get a job transfer where the commuting distance is too far from their home.

  • Under the old FHA Handbook, a home buyer can have two FHA Loans under the following circumstances:
    • If they were to relocate due to their jobs and the commuting distance was beyond a reasonable distance
  • Under the Revised HUD 4000.1 FHA Handbook, a FHA borrower can have two FHA Loans if and only if the relocation of employment is more than 100 miles commuting distance from their original main residence to their job relocation
  • Here is a great article about hud homes network by The Gustan Cho Team at Loan Cabin Inc.

HUD 4000.1 FHA Handbook On Social Security And Pension Income

HUD 4000.1 FHA Handbook On Social Security And Pension Income

Social security income and pension income counts as qualified income for FHA Loans.

  • Under the old FHA Handbook, non-taxable income such as social security income and pension income could have been grossed up by 0.25% if borrower did not file a tax return
  • Under the new revised HUD 4000.1 FHA Handbook, borrower can gross up their social security or pension income using the greater of 15% and/or the FHA borrower’s actual income tax rate
  • In the event if borrower did not file an income tax return, then mortgage underwriters will utilize the income tax rate of 15%

HUD 4000.1 FHA Handbook On Manual Underwriting

HUD 4000.1 FHA Handbook On Manual Underwriting

Under the old FHA Handbook, all manual underwriting was up to underwriter’s discretion as long as the borrower had compensating factors.

  • Under the revised new HUD 4000.1 FHA Handbook, all manual underwriting FHA Loans require verification of rent
  • Verification Of Rent is only valid if borrowers provides 12 months canceled checks and/or 12 months online bank statements
  • This is required to show that they have made timely monthly rental payments to their landlord 
  • If the FHA borrower has had a mortgage, then no more than two 30 day late payments are allowed in the past 24 months
  • Mortgage underwriters who are doing a manual underwrite may approve borrowers who has an acceptable payment history as long as borrower has not had any major late payment and/or derogatory credit payment history on their credit accounts
  • This hold true especially revolving credit accounts for the past 12 months
  • Major derogatory credit is defined as any revolving credit accounts are credit payments that are more than 90 days or more past due after the initial payment due there and/or three or more credit accounts that are 60 days or more late from the initial due date

Qualifying For FHA Loans With Direct Lender With No Overlays

Qualifying For FHA Loans With Direct Lender With No Overlays

The Gustan Cho Team at Loan Cabin Inc. is a direct lender with no mortgage overlays on government and conventional loans. Over 75% of our borrowers are folks who could not qualify at other banks and lenders due to their lender overlays. Loan Cabin Inc. has ZERO OVERLAYS on FHA Loans and we just go off Automated Underwriting System Findings and just follow HUD 4000.1 FHA Handbook Guidelines. Home Buyers and Homeowners who need to qualify with a direct FHA Lender with no mortgage overlays, please contact us at The Gustan Cho Team at Loan Cabin Inc. at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holiday.

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