Often, the FHA loans have been viewed as easier to obtain when compared to a “regular” conventional loan. There is some truth to this notion. Historically, borrowers who may not have been able to qualify for conventional financing have been able to qualify for the FHA program. This is often because government backing makes lenders a bit more forgiving when it comes to borrower qualifications and credentials.
But the qualification “gap” has narrowed over the last two or three years. The reason for this is that the Federal Housing Administration’s capital reserve fund (the money they are required to have on hand) diminished during the housing recession. In 2013, the usually self-sufficient agency required a taxpayer bailout of $1.7 billion to cover losses resulting from defaulted loans made during the housing collapse. In the agency’s 79-year history, this was the first occasion that it required taxpayer funding to stay afloat.
In the wake of those troubles, the Department of Housing and Urban Development made a series of FHA program changes designed to, first, bolster revenues and, second, reduce future losses. Among the changes were new credit-score rules for borrowers, reduced limits on maximum loan size and higher insurance premiums. In short, the agency has set higher standards for borrowers, and increased premiums for FHA loans. Many of these guidelines already took effect in 2014 and June 2015. However, we will discuss the additional guidelines that are going to take effect in September of 2015.
September 2015 Guidelines and Requirements at a Glance
On September 15th, 2015, the Federal Housing Administration changed the FHA mortgage loan requirements regarding its single family home loan program. A glance of the more impactful changes have been summarized below:
Large Deposits
For recently opened accounts and recent individual deposits, large deposits will be defined as more than 1% of the adjusted value. The adjusted value is the lesser of the purchase price minus seller concessions or the appraised value of the home. The mortgagee must also verify that no debts were incurred to obtain part or all of the minimum required investment.
For example, if a $400,000 home that has a $5,000 seller concession is appraised for $400,000 or more, then a large deposit would be calculated as more than $1,950 (400,000 – 5000 = 395,000. 395,000 x 0.01 = 3,950).
Part-Time Income
Two years of uninterrupted part-time income will be required. Your average over that two-year period will be used in calculations. However, if you received a pay increase, you can instead calculate your average over the past 12 months.
Self-employed Declining Income
You cannot use your income if it has had more than a 20% decline except in extenuating circumstances, and it has been either stable or increasing during the past 12 months. However, you need to qualify using your lower income.
Frequent Employment Changes
If you have moved more than three times in the past 12 months for work, then the FHA mortgage loan requirements must obtain proof that the moves either advanced your income or benefits, or that you needed the education and/or training and can document that fact.
Hourly Earning Calculation
There are several options that can be used to determine the hourly earning calculations to make it fair to different situations. If the hours do not vary, use the hourly rate. If the hours vary, use a two-year average. If the hours vary and there is a documented increase in pay rate, use a 12-month average of hours at the current pay rate.
Overtime and Bonus Income Calculation
You can include a two-year history of overtime and bonus income in your loan application. You will be allowed to use a 1-2 year history if you have earned overtime and/or bonuses consistently during that time, and are likely to continue doing so. However, if the income from the current year decreases by 20% or more from the prior year, they would use the current year’s income.
Rent Obtained from Retained Primary Residence
When relocating for work, the FHA mortgage loan requirements specify that your new residence must be at least 100 miles from your current property. You also need at least 25% equity in the current property, unless the rental income history is on your last tax return.
Non-taxable Income
You can include non-taxable income, such as social security and disability, in your qualifying income, up to a gross maximum of 15% or that income at its actual tax rate.
Deferred Loans
Loan payments must be calculated and included in debt-to-income ratios, regardless of their status. You must use the actual monthly payment, but if the actual payment is $0, then you need to use your outstanding balance as your monthly payment.
Installment Debt with Less than 10 Months
According to FHA mortgage loan requirements, you can exclude such accounts from debt-to-income ratios if the total remaining payments due is less than 5% of your gross monthly income.
30 Day Accounts that Require Payment in Full
You can exclude such accounts from your debt-to-income ratio if you can document your payments in full for the last 12 months. If you have had any late payments in that time, then 5% of that balance will be included in your debt ratios.
Authorized User Accounts
If you are the primary holder of an account, and have made payments on time on that account over the last 12 months, then you can exclude that account from your ratio. This helps ensure that debt will not be counted against people who had their parents help them establish credit and who are still listed on an account, but no longer use that account.
Multiple FHA Loans
You can obtain a second FHA loan for your primary residence if you are relocating for work when your workplace is more than 100 miles from your current home. This change does not account for high traffic areas where commutes can take exceptionally long times.
Acceptable Mixed Use Properties
A minimum of 51% of a building’s square footage must be intended for residential use. This is an increase in the allotment of mixed use from the previous rules.
Rental Income for 2-4 Units
When buying a property that has between 2-4 units, you can add the rental income from the other units to your qualifying income. Specifically, you can use 75% of either the appraiser’s estimate of fair market rent or the rent based on the rental agreement.
This change lowers the amount you can specify when qualifying for the purchase of a multi-family property.
Streamlined Refinancing – Net Tangible Benefits
A reduction in term will be deemed an acceptable net tangible benefit as long as the total of the principal, interest, and mortgage insurance is no more than $50 a month higher than your current loan.
These new guidelines for the FHA loan program may impact a borrower’s decision to get a certain type of home loan. It’s important that you encourage your clients to consult an experienced loan officer for information about their particular situation and the loan programs that are available.
This has been a summary of the upcoming FHA loan program changes. Although the information is accurate to the best of our abilities, please defer to the HUD regulations when necessary. You can learn more about the FHA Loan program here.