Gustan Cho The Mortgage Expert,
Publish On: January 25, 2023
In this guide, we will cover the major changes in FHA guidelines HUD 4000.1 Handbook that can affect borrowers of FHA loans. Major Changes In FHA Guidelines were implemented two years in a row under the revised HUD 4000.1 Handbook.
In this guide on FHA guidelines, HUD 4000.1 Handbook can be used as a Cliff Notes for FHA loans by loan officers, homebuyers, homeowners, realtors, and third-party mortgage and real estate professionals. It is easier and faster to navigate through GCAs FHA guidelines HUD 4000.1 Handbook on FHA loans than it is to navigate through the 1,000 pages of HUD’s Mortgagee Letter of the actual HUD 4000.1 FHA Handbook.
The HUD 4000.1 FHA Handbook lists all HUD Agency Mortgage Guidelines on FHA loans. As changes occur, Gustan Cho Associates will be updating this article, so our viewers are aware of changes in qualifying for FHA loans. In the following sections, we will cover the frequently asked questions on the FHA guidelines with the most conflicting answers from mortgage lenders. We will give you FACTS and not what you want to hear.
What Is The Most Recent Version of the HUD 4000.1 Handbook
Over 30% of our viewers at Gustan Cho Associates are loan officers and mortgage professionals. Therefore, we find it very important to have all of our content about the latest agency changes in mortgage guidelines updated. We update the most recent version of the HUD 4000.1 Handbook on www.gustancho.com and our sister affiliate websites. Please feel free to use the comment section below this article if you have any questions, and concerns with the latest changes in the HUD 4000.1 Handbook on FHA loans.
What Are The HUD Guidelines on FHA Loans
Gustan Cho Associates will do our best to update this article when we hear of any changes in agency mortgage guidelines. These changes can often affect home buyers and homeowners refinancing their home loans to an FHA-insured mortgage loan. This mortgage blog article will be helpful for those thinking about getting into the housing market, especially first-time homebuyers.
Under the umbrella of the United States Department of Housing and Urban Development (HUD), FHA has created a newly revised set of FHA Guidelines under the revised HUD 4000.1 FHA Handbook. We will be covering the most frequently asked questions about HUD guidelines on FHA loans borrowers often are confused about after being told NO by lenders who tell them they do not qualify for an FHA loan.
One of the major changes in FHA Guidelines under HUD 4000.1 is the changes of deferred student loans and documentation of gifted funds by family members and relatives for the main borrower to use for the down payment on a home purchase and closing costs for a home purchase.
Loan-To-Value Update on Cash-Out Refinance on FHA Loans
One of the major benefits of doing a cash-out refinance on FHA loans versus other home mortgage programs was FHA allowed a maximum of 85% loan to value on cash-out refinances. However, HUD changed its cash-out loan to value agency guidelines, where it lowered the LTV to 80% on cash-out refinance mortgages.
How Do You Win a Bidding War With FHA Loans?
The housing market is booming, and home prices are soaring. Many homeowners are gaining substantial home equity due to skyrocketing home values. Due to rapidly increasing home values, HUD and the Veterans Administration lowered the loan-to-value caps on cash-out refinances. VA lowered the loan to value on cash-out refinances to 90% LTV from 100% LTV.
Major Changes To Deferred Student Loans
The Federal Housing Administration released the new HUD 4000.1 Handbook on September 14, 2015, replacing all other HUD FHA Handbooks. Some guidelines will remain the same, while others will have major changes in FHA Guidelines. One of the most significant changes in FHA Guidelines will be the changes in deferred student loans which will affect and hurt home buyers with larger student loan balances.
What Has Changed To Student Loan Guidelines on FHA Loans
Before this new FHA Guideline change, homebuyers with student loans could have their student loan payments exempted from debt-to-income ratio calculations. This only holds if their student loans were deferred for at least 12 months.
Now that is not the case. Whether the student loans are deferred for longer than 12 months or if borrowers have zero payments on student loans due to an income-based repayment plan, also referred to as IBR, there will always be an amount that is included in the borrower’s debt-to-income ratios. For IBR payments to be used on FHA loans, the IBR payment cannot be zero. It needs to be higher than zero. At least one dollar IBR payment.
Income-based repayment is now allowed on FHA loans. However, it can not be a zero IBR payment. It needs to be at least a one-dollar or higher monthly IBR payment.
Student Loan Debt Versus DTI
Suppose the borrower and student loan provider cannot document the monthly student loan payments due to the student loan being in deferment, or the payment is $0 per month because the borrower is on an income-based repayment plan, IBR. In that case, the mortgage underwriter will use the following:
- 0.5% of the balance of the student loan will be used as a monthly hypothetical monthly debt expense
- The 0.50% of the outstanding student loan balance figure will be used to calculate the borrower’s debt-to-income ratios
- The borrower does not have to pay anything on the student loan debt
FHA loans now accept income-based repayment plans just like conventional loans. Also, borrowers now get to use 0.50% of the student loan balance as the hypothetical monthly student loan debt for debt-to-income ratio calculations.
How High Student Loan Balances Affect DTI on FHA Loans
The 0.50% outstanding student loan is a hypothetical debt used in DTI calculations. Or the second option is to contact the student loan provider and get a hypothetical monthly fully amortized payment over an extended term (normally 25 years).
The fully amortized monthly payment over an extended term needs to be in writing by the student loan provider. You can ask the student loan provider customer service representative if you can get a longer extended repayment term longer than 25 years.
If the extended term is longer than 25 years, your fully amortized student loan payment may be less than the 0.50% of the outstanding student loan balance.
Getting Hypothetical Amortized Monthly Payment From Student Loan Provider
The fully amortized monthly payment over an extended term can be used in lieu of the 0.50% of the outstanding student loan balance. This amount normally turns out to be just under 0.50% of the outstanding student loan balance. Borrowers with higher student loan balances need to see if they can qualify for conventional loans. Conforming Loans accepts IBR Payments as long as it reports to credit bureaus. This holds even for zero monthly payment IBR payments.
Other Major Changes In FHA Guidelines Under HUD 4000.1 Handbook
Other major changes in FHA Guidelines can affect borrowers of FHA loans. Self-employed Borrowers need to provide two years of income tax returns still. Mortgage underwriters are very careful underwriting self-employed borrowers. S
elf-employed borrowers need to provide two years of federal income tax returns. If the borrower has W2 income from self-employment income, the borrower needs to own less than 25% of the company to use the W2 income and not the company tax returns. If the borrower owns 25% or more of the company, the company’s federal tax returns need to be used.
Another thing mortgage underwriters look at is declining income. With self-employed borrowers with a 20% or more declining income from one year to the next, this needs to be downgraded to manual underwriting.
Decreasing Income For Self-Employed Borrowers on FHA Loans
The self-employed borrower mortgage loan application cannot be based on Automated Underwriting System findings with cases where self-employment income has decreased by more than 20% from one year to another. There are changes in waiting periods after bankruptcy, foreclosure, deed in lieu of foreclosure, and short sale to qualify for FHA loans.
Waiting Period Guidelines After Bankruptcy and Foreclosure
There are mandatory waiting period requirements after bankruptcy, foreclosure, a deed in lieu of foreclosure, and a short sale on government and conventional loans. The waiting period will be determined by ordering the FHA case number assignment date instead of the application date. This change in FHA guidelines is a benefit and will speed up mortgage loan applications. On FHA refinance mortgage loans on land contract refinances, the deed of the land contract needs to be recorded for the refinance mortgage to proceed.
Major Changes In FHA Guidelines With Gift Funds
Homebuyers getting gift funds for their down payment need to have the gift fund donor provide 30 days of bank statements. Gift funds can be used for the down payment and closing costs on FHA loans. Gift funds cannot be used for reserves.
Gift Funds need to be a gift and not a loan. Gift funds for a home purchase needs to only be used for the down payment and closing costs on a home purchase and never can be used for reserves. Reserves can only be from the borrower’s own funds and cannot be gifted.
The bank statement must show proof of the gift funds leaving the donor’s bank account and into the home buyer’s bank account if it is from a bank wire transfer or provide a canceled check to show documentation.
What Documentation Is Required For Gift Funds on FHA Loans?
The mortgage lender provides a gift letter stating that the gift funds are solely a gift, not a loan. The gift letter also needs to state the gift will not be paid back and needs to be signed by the gift fund donor.
The gift fund letter must be fully legible and cannot have whiteouts or cross-outs on the bank account balances and any numbers. Any irregular and large deposits in the donor’s bank accounts will be carefully reviewed and questioned.
In general, gift funds are not viewed favorably by automated underwriting systems or by mortgage lenders. If you get a refer/eligible per the automated underwriting system with gift funds, try removing the gift funds and re-running AUS. You will be surprised by how often you will get an automated underwriting system without gift funds versus with gift funds. Gift funds can be used for a home purchase’s down payment and closing costs.
FHA Spot Loans on Non-HUD Approved Condominiums
More and more condominium complexes are not renewing their annual HUD condo certifications due to the costs and red tape involved. HUD has allowed FHA Spot Loans. FHA Spot Loans are when condo buyers can qualify for a condo purchase with an FHA loan in a condo complex where the condo complex is not HUD Approved.
Gustan Cho Associates, empowered by NEXA Mortgage, LLC, are mortgage brokers licensed in 48 states, including Puerto Rico, Washington, DC, and the U.S. Virgin Islands. With a lending network of 210 wholesale mortgage lenders, there is no mortgage loan program Gustan Cho Associates does not offer its borrowers.
Condominium sales are expected to surge with the re-emergence of FHA Spot Loans. The re-emergence of FHA Spot Loans will enable homebuyers who prefer a condominium versus a single-family home to purchase a condominium unit with an FHA loan. FHA loans are the most popular mortgage loans in the nation for first-time homebuyer borrowers with high debt-to-income ratios, borrowers with bad credit, homebuyers with outstanding collections and charge-off accounts, and homebuyers with credit scores down to 500 FIC.
This blog on Major Changes in FHA Guidelines was updated on January 25th, 2023.
