Updated FHA Loan Requirements

Updated FHA Loan Requirements on HUD Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This guide covers updated FHA loan requirement on home loan programs. Updated FHA loan requirements go into effect immediately. In this guide we will cover Updated FHA loan requirements. FHA loan programs have traditionally been one of the most easiest mortgage loans for home buyers to qualify. This is due to the lax and lenient FHA mortgage lending guidelines. HUD understandis that just because consumers had periods of bad credit does not mean that they should be excluded from home ownership.  FHA loan programs are great for first time home buyers, home buyers needing non-occupant co-borrowers to qualify due to little or no income documentation, home buyers with prior bad credit, home buyers with prior bankruptcy and foreclosure, and home buyers with high debt-to-income ratios.

Types of FHA Loans

FHA (Federal Housing Administration) loans offer various options to suit the different needs of borrowers. Here are some common types of FHA loans:

Fixed-Rate FHA Loan

This is the most traditional type of FHA loan where the interest rate remains constant throughout the loan term. Borrowers typically choose between 15-year and 30-year fixed-rate terms.

Adjustable-Rate FHA Loan (ARM)

Unlike fixed-rate loans, the interest rate on an ARM FHA loan can fluctuate over time based on market conditions. These loans usually start with a lower interest rate, which may adjust periodically.

FHA 203(b) Loan

This is the standard FHA loan used to purchase or refinance a primary residence. It’s the most common type of FHA loan. It can be used for various purposes, including buying a home, renovating a home, or refinancing an existing mortgage.

FHA 203(k) Loan

 This loan is for home renovations and repairs. It allows borrowers to finance the home’s purchase price and the cost of repairs or renovations into a single mortgage.

FHA Streamline Refinance

This type of loan is available to borrowers who already have an FHA loan and want to refinance to lower their interest rate and monthly payments. Streamline refinances are typically easier and faster because they require less paperwork and documentation.

Energy Efficient Mortgage (EEM)

This FHA loan program helps borrowers finance energy-efficient home improvements. The cost of the improvements is added to the FHA loan amount, allowing borrowers to make energy-efficient upgrades without a large upfront expense.

Graduated Payment Mortgage (GPM)

GPMs are a type of FHA loan where the initial payments are lower than those of a traditional fixed-rate mortgage but gradually increase over time. This can benefit borrowers who expect their income to increase in the future.

Home Equity Conversion Mortgage (HECM)

Also known as a reverse mortgage, HECM is a type of FHA-insured loan available to homeowners aged 62 and older. It allows them to convert part of their home equity into cash without selling their home or making monthly mortgage payments. Each type of FHA loan has its own eligibility requirements, benefits, and considerations, so borrowers must research and understand their options before choosing the one that best fits their financial situation and goals.

HUD Minimum Credit Score Guidelines on FHA Loans

FHA loans only require credit scores of 500 FICO. If a borrowers credit scores are under 580 and down to 500, HUD, the parent of FHA, requires a 10% down payment. 580 FICO with a 3.5% down payment on a home purchase. Updated FHA loan requirements went into effect through HUD 4000.1 FHA Handbook. More changes and updated FHA loan requirements will be expected into 2025. In this article, we will discuss and cover the updated FHA loan requirements on home loans. Click here to apply for FHA loans with minimum credit guidelines

Updated HUD Guidelines That Went Into Effect

HUD released updated FHA loan requirements including updates on FHA home appraisals. FHA home appraisers needs to document a three year chain of title on all home appraisals. The appraiser needs to refer 2 sources from the multiple listing service, also referred to as MLS, or public records.

The FHA home appraiser needs to check all appliances in the subject property the appraiser is inspecting. Need to make sure that it is operational which means that utilities needs to be on.

Appliances such as dishwashers, refrigerators, and stoves needs to be tested for proper operations so the home needs to have live electricity, running hot water, and gas. The FHA home appraiser also needs to review the home ownership record. The appraiser needs to evaluate when the property was sold in the past 12 months. Also need to check for undisclosed identity of interest property transactions.

Updated HUD Requirements on Deferred Student Loans

Updated FHA loan requirements on deferred student loans will affect many home buyers with large student loans that are deferred. In the past, any deferred student loans that is deferred for at least 12 months can be excluded from debt-to-income calculations. With updated FHA loan requirements, this will no longer be the case.

All student loans, deferred or not, a monthly payment will be taken into effect. HUD now allows income-based repayment to be used on for debt-to-income ratio calculations.

Income-based repayment allowed on FHA loans is huge for borrowers. If a borrower has six figure student loan balance and the IBR is $100.00 per month, then the IBR payment of $100 per month can be used. The actual student loan monthly debt obligation is to be used in calculating the borrower’s debt-to-income ratios. In the event if the monthly student payment debt is zero or the monthly payment is not available, then the monthly payment used for student loan calculation will be 0.50% of the outstanding student loan balance. Or, we can use a hypothetical fully amortized monthly payment over an extended term by the student loan provider in lieu of the 0.50%.

Updated HUD Guidelines on Credit For FHA Loans

What are the mortgage guidelinesCredit cards that are due within 30 days such as American Express credit card accounts will have updated FHA loan requirement changes as well.. These types of credit accounts can be excluded from debt to income ratio calculations. This only holds true if the lender can verify that borrowers have paid the outstanding credit card balance in full each and every month for the past 12 months. In the event if the borrower had any outstanding collection accounts, then 5% of the credit accounts outstanding balance needs to be used for debt to income ratio calculations. All authorized credit card user accounts will count towards the authorized users debt-t-income ratios. This holds true unless the authorized credit card user can prove that the main user has paid the whole monthly minimum payments in the past 12 months. Need to show proof of 12 months canceled checks or bank statements of the main card user.

Updated FHA Loan Requirements on Installment Debts Less Than 10 Months

The old rule with installment debts less than 10 months was that these debts can be excluded from debt-to-income calculations. However, updated FHA Loan Requirements on installment debt less than 10 months may be excluded from debt-to-income ratio calculations. This holds true if only and only if they have cumulative payment of less than or equal to 5% of the borrower’s gross monthly income. The borrower is forbidden from paying down this balance to reach this required percentage.

Updated FHA Loan Requirements on Employment

Updated FHA loan requirements on employment require if the borrower has changed employers more than 3 times in the past 12 months, the lenders is required to take measures and steps to verify the borrower has stable employment and the income is likely to continue for the next three years.

The old requirements on part time employment was that the mortgage underwriter had full underwriter’s discretion when the borrower has been employed part time for less than two years but is most likely to continue.

The updated FHA loan requirements on part-time Income is mandatory two years uninterrupted employment of part time income if part time income will be used. With regards to gaps in employment , for borrowers who had gaps in employment for greater than six months, then six months on their new job is required to qualify for FHA Loan. Taking time off to raise a family will no longer be considered an acceptable reason for gaps in employment. Click here to get more information about FHA loan requirements on emploment

Updated FHA Loan Requirements on Gift Funds

Gift Funds are allowed with FHA loans. If the down payment gift funds is given to the home buyer, the lender needs to verify the gift funds. Make sure that the donor gift funds have been seasoned in their bank account for at least 30 days. Need to source any large or irregular deposits of the donor’s bank statements. Real Estate Commissions can be used as a source of down payment as a gift by family member who is a licensed real estate agent. The lender needs to verify and get proof when real estate commission income is used as funds to close. Need proof the real estate commission or gift that either the borrower and/or family member or relative legitimately holds a real estate agents or real estate brokers license and that they are entitled to the commission.

Updated HUD Rental Income Guidelines on Retained Primary Home

The old FHA loan requirements on this subject matter was that rental income can be used when the home buyer relocates outside of reasonable commuting distance. Relocation needs to be due to job. The borrower has at least 25% equity in their home. The new updated FHA loan requirements on rental income on retained primary home is that rental income can be counted due to relocation. The new home purchase is at least 100 miles from the home buyer’s previous residence. In the event if the new home buyer had no history of rental income on his or her income tax returns, then the borrower needs to have at least 25% equity on retained primary property.

Updated FHA Loan Requirements on Non-Taxable Income

The old FHA loan requirements on social security income or non-taxable income was if the mortgage loan borrower did not file an income tax return, then they can use the tax rate of 25% to gross it up. The updated FHA loan requirements on non-taxable income is using the greater of 15% or actual tax rate of the mortgage loan borrower. If the borrower did not file an income tax return, then the lender will need to use the income tax rate of 15%. With regards to multiple FHA loans, a home buyer can have multiple FHA Loans if they are relocating to another jurisdiction due to a job transfer or new job that is at least 100 miles from their departing home with the first FHA loan.

Click here to apply for FHA loans with minimum credit guidelines

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