In January of 2014 there’s a proposed change by the Consumer Protection Finance Bureau (CFPB) that will make it very difficult to originate loans if the total debt owed by the Borrower exceeds a maximum ratio established by the Bureau. Those mortgages that are originated and are under the established ratio will be considered a “Qualified Mortgage” (QM) and will be able to be sold to the US Government and through the Fannie Mae and Freddie Mac delivery systems. The banks that generate FHA Home Loan QMs will benefit because they will have not have to hold as much money in reserves.
The result is that FHA Homes Loans North Carolina Debt To Income Ratios are getting tighter for loans that have a middle credit score under 640, in anticipation of this CFPB guidance. This summer the Automated Underwriting system for USDA Home Loans made an adjustment to reflect the upcoming changes expected next January. In the last two weeks we began receiving notices of tightening to the underwriting guidelines, and overlays from Investors, for FHA Home Loans in North Carolina with lower credit scores.
FHA Homes Loans North Carolina Debt To Income Ratios
FHA Home Loans in NC are great because there are no restrictions of where the property must be located (like the restrictions you find with USDA Home Loans) and there’s a relatively low down payment requirement of 3.5%. The 3.5% can be a gift, or those meeting the NCHFA Grant requirements can get up to $8000 in the form of a forgivable grant to use as downpayment.
In general, to get an approved FHA Home Loan in NC you will need 2 credit scores that are at least over the 600 bench mark, and on time payments on all accounts for the last 12 months. If you have credit scores under the 640 bench mark, you will now also need to meet tighter underwriting debt to income ratios.
If you are a borrower with scores under the 620 mark (these loans are harder to get approved through the FHA AUS) – we’ve found that having at least 3 months of home payments left over in the bank after closing is viewed positively by the FHA Automated Underwriting System (FHA AUS).
This is not a FHA Home Loan underwriting guideline, it just seems to be something that is “baked into” the FHA AUS, and it takes the “risk factor” down on the loan.
FHA Home Loans in North Carolina also have a provision that allows for a non-owner occupied co-borrower. The FHA Home Loan Non-Owner occupied loan works especially well for folks who are either in college, and don’t have a well established full time job, or are in graduate school working on a grant or stipend. This FHA Home Loan program also works especially well for a family where one person has decent credit, and one spouse has rough credit. Recently FHA loosened the guidelines for waiting periods after a foreclosure, bankruptcy, short sale or serious credit challenge if there was a job loss.
There are two ratios that we use to qualify someone for a home loan in NC. The first ratio is typically referred to as the “housing” ratio. To calculate that, we take your gross monthly income (so before taxes) and divide the housing expense (meaning home loan payment, insurance, taxes, PMI, Home Owner Association Dues) into your income.
So for easy math, let’s say you make $5000 before taxes a month – ideally, you should not have a total housing expense of more than 28%, or $1400. With the housing ratio, we can go over the “ideal” 28% – however, once you approach 33 or 34% of gross monthly income, the Automated Underwriting System (FHA AUS) starts “kicking” people out.
To calculate the Total Debt to Income Ratios, you would take the total housing payment, and add any monthly debt to it. The debt we count would include car payments, student loans,credit card payments – child care, cell phone bills, health insurance (for example) do not count in that debt “bucket.”
At this point, the Maximum Debt to income ratio proposed for FHA Home Loans when the middle credit score for one of the borrowers is under 640 would be 43.000%. That would mean based upon that $5000 a month gross income, your total monthly debt payments, including the house payment should be no more than $2150. So if you take the $2150 and subtract out our house payment of $1400, in this example you could not have more than $750 in monthly debt.
Our understanding is that the FHA Home Loan guidelines in the Automated Underwriting System (FHA AUS) have not been changed yet – but we know that 43.000% is the maximum debt that the CFPB is mandating for a Qualified Mortgage. We are already getting notices from Investors that for loans with lower credit scores, they are looking for these tighter ratios. So we know that 43.000% will be the ratio that is targeted by most banks and the AUS in the coming months. As I said – the USDA Automated Underwriting System has already made a change that makes it harder to get an approval over the 43% mark.
Ahead of the Qualified Mortgage CFPB guidance – the FHA Homes Loans North Carolina debt to income ratios for folks with middle credit scores under 640 are changing now, and we think that the ratios for other loans will migrate in the coming months to this tighter standard. We can use additional NCHFA resources that help us expand the ratios – so if you are “tight” don’t give up! Not all lenders offer the NC Tax Credits, but we work with them every day.