FHA (and all government underwriting for that matter) is somewhat different from other, more automated systems of loan approval. On an FHA loan you can actually have a real person look at the loan and apply the golden rule – not just a bunch of meaningless stipulations. This is often the difference in making the dream of homeownership a reality… because not everybody has a perfect credit history, with a 20 year job, and 2.3 kids!
With FHA – there’s the magic of COMPENSATING FACTORS. Some of our favorites include:
1. Borrower has already demonstrated they can afford this house payment. No payment shock, or at least a payment shock of less than 10% is a great offsetting factor for slightly higher debt ratios or a job history that is not as solid as we’d like to see.
2. Borrower can afford to put 10% down. I’m not talking about a gift (which FHA allows) I’m talking about a good old fashioned asset, and a behavior to save.
3. Conservative use of credit. Does the borrower have a 3 year old car that’s paid off because they don’t like having payments? Do they pay their credit cards off every month?
4. The Borrower will have at least 3 months of PITI in reserves after closing on their Primary Residence. FHA does not require reserves to insure a primary residence (unlike Conventional loans) and this additional “padding” can be a great offsetting factor.
5. Borrower has potential salary increases that you are not counting in your Debt ratios… if the employer indicates that the borrower has a review and potential raise coming up in the next few months this is a great off-setting (or Compensating) factor. (It’s difficult to get an employer to put that in writing for obvious reasons.)
FHA requires that part time employment have a history of at least 12 months. Therefore if you have a part time job with 8 months of history (for instance) we could not use those in the debt ratios – but we could use that income as an offsetting factor for higher ratios. Rent from potential roommates, which would be logical income even with a lease agreement, is rarely considered in our experience. 8o(
If you have questions about purchasing a home in the Triangle - please call Steve and Eleanor Thorne at Corporate Investors Mortgage Group in Raleigh, NC 919-649-5058
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