FHA Mortgage Loans have traditionally been the easiest loans to qualify for, because they offer “understanding” forgiveness when it comes to previous credit issues, they allow common sense underwriting of income, and they offer fairly low mortgage interest rates. FHA Mortgage Requirements changed slightly last fall. While we’ve discussed the major shift in these upcoming guidelines (READ: Student Loans In Deferment), there are other, subtle changes that not all loan officers will pay attention to.
We find with this blog, especially, that it’s these sorts of changes that borrowers complain about the most… “Our loan has been in process for 5 weeks, and NOW we are learning that…” something is going to delay the closing. Because we are trying to educate folks, I figured I would take a minute and let you know about the most obvious changes I see happening this fall with FHA Mortgage Requirements.
FHA Mortgage Requirements In Effect
Appraisals – Property Changes
- The Appraiser must now document a 3 year chain of title on Appraisals and reference 2 sources, meaning MLS and Public Records (for instance)
- Appraiser must OPERATE THE APPLIANCES IN THE UNIT. This means that the electricity, etc. must be on when the appraiser goes to see the unit, and you can’t just have an old tove or refrigerator not plugged in, that doesn’t work in the home.
- The Appraisal must note if a property is in a changing area (like downtown Cary) that it meets 4 standards for highest and best use, which could make those “fringe” properties more difficult to qualify.
New Rule – Prior Ownership Review When Property Is Sold within 12 Months – Prior ownership must be reviewed for undisclosed identity-of-interest transactions.
New Rule – Shared Well Feasibility – Shared wells will only be allowed if 1. Connection to public or community water is not feasible. 2. Property is not located in an area where local officials have determined a public connection is feasible.
Other FHA Mortgage Changes
FHA Mortgage Requirements – DEBT
In the past, student loans that had 12 or more months of deferment left were not considered in the debt-to-income (DTI) ratio calculations. Beginning with the new guidelines, however, student loan debt will not be excluded from FHA loans, even if that debt is in deferral. The actual monthly obligation of the loan is to be used in the DTI. If the monthly payment is either zero or is unavailable, the monthly payment will be established at 2 percent of the outstanding balance of the loan.
30-day accounts, like American Express credit card accounts, also see changes. Mortgage companies will be required to verify that borrowers have paid the outstanding balance in full each month for the previous 12 months. But these debts, if paid off monthly, will not be calculated in the DTI.
If borrowers have had any late payments in the past 12 months on a revolving account, means that you now are required to count 5% of the account’s outstanding balance. This is the payment that will be included in the DTI.
Accounts for which the borrower is an authorized user will now be included in the FHA Mortgage DTI unless the lender can document that the primary account holder has made all payments on that account for the past 12 months.
Installment Debts Less Than 10 Months—
Old Rule – May be excluded from ratios. If manual underwrite—may be excluded if debt will not affect ability to pay the mortgage.
New Rule – May be excluded ONLY if—they have cumulative payment of less than or equal to 5% of the borrower’s gross monthly income AND the borrower may not pay the debts down to achieve this percentage. This is really important if someone is only a few months away from paying off a car, for instance.
New Rule – Non-Traditional Credit or Authorized User Accounts as Credit References – Must document 12 month’s history of payments on an account where the borrower is an authorized user is an acceptable credit reference. On USDA Loans we are having to take Authorized User Accounts off of the Credit Report, and re-calculate the credit score. It’s not written in the FHA Mortgage Requirements that we do this… but I would not be surprised to see that as a requirement on some lower credit score loans.
FHA Mortgage Requirements – EMPLOYMENT
If the Borrower has changed employment more than 3 times in the past 12 months, the lender is obligated to take steps to verify that the borrower has stable employment income.
The Old Guideline on Part Time Income stated that: Underwriter discretion is allowed when borrower has been employed part time for less than 2 years but is likely to continue. The New Guidelines say that: Two years of uninterrupted part-time income is required. THIS is a pretty big change.
Gaps of employment that lasted for more than six months require at least six months on the new job. And raising a family is no longer considered an acceptable reason for an employment gap.
FHA Mortgage Requirements – GIFT FUNDS
If down payment money is given to the borrower, the lender will now have to verify the source of these funds. The lender must obtain a statement of the giver’s bank account and ensure that any large deposits in the account came from a reliable source.
Family Member Definition
New definition of who qualifies as a family member, regardless of actual or perceived sexual orientation, gender identity, or legal marital status; includes domestic partners.
OTHER CHANGES TO NOTE:
New Rule – Real Estate Commissions Used Towards Funds to Close –When commission income is used as funds to close through commission or gift, the lender must document that the borrower real estate agent or the family member holds a real estate license and is entitled to the commission.
New Rule – Case Number Transfer Timeline – Immediately upon the request of the borrower (there was no formal written rule previously).
Old Rule – Document source of earnest money if the amount exceeds 2% of the sales price
New Rule – Document source of earnest money if the amount exceeds 1% of the sales price
Rental Income on Retained Primary Residence
Old Rule – Rental income may be counted when relocating outside of reasonable commute distance for job and borrower has 25% equity.
New Rule – Rental income may be counted when relocating and the new residence is at least 100 miles from previous residence. If no history of rental income since the last tax filing, borrower must have 25% equity.
Non-taxable income –
Old Rule – Gross up using tax rate evidenced on last tax return. If borrower did not file a return, use tax rate of 25%.
New Rule – Gross up using the greater of 15% or actual tax rate. If borrower did not file a tax return, use tax rate of 15%
Multiple FHA Loans
Old Rule – If relocating for employment, borrower may obtain a second FHA loan for a new principal residence if current residence is more than a reasonable commute to new residence.
New Rule – If relocating for employment, the commuting distance between the old residence and new residence must be more than 100 miles.
If you have questions about purchasing a home in NC using a FHA Mortgage Loan, or if you have more questions about FHA Underwriting Guidelines please call Steve Thorne at 919-649-5058. We do many FHA loans, we offer today’s lowest mortgage rates, and we can help!