FHA Guideline changes are Affecting Some Borrowers Capability to Get Loans

Even though FHA guideline changes have been in place since September, many real estate agents, lenders and borrowers are still learning that some borrowers will not be able to get an FHA loan based on the new criteria even though they could have under the old guidelines.

The majority of updates concerns how income is calculated on a mortgage application; and how applicant debt should be treated by an underwriter. Many FHA borrowers are unaffected by changes. Some, though — including buyers with student loans — are affected directly.

Student Loans
Formerly : Loans in deferment for at least 12 more monthly did not count towards a borrower’s debt-to-income (DTI) ratio
Now : All loans in deferment apply toward a borrower’s debt-to-income. The corresponding payment is 2% of the outstanding balance, unless a specific payment can be documented. With $25,000 in student loans, then, the FHA assumes a monthly payment of $500.

Credit Cards
Formerly : “Authorized” users of a credit card had no responsibility to make monthly payments. Payments did not count toward a borrower’s debt-to-income (DTI) ratio.
Now : Authorized users of a credit card must include the card’s monthly minimum payment in their DTI unless it can be shown with canceled checks that the last 12 payments have been made by the credit card’s primary owner.

Installment Loans / Car Loans
Formerly : Installment loans with 10 or fewer payments remaining was not included in a borrower’s DTI.
Now : For installment loans with 10 or fewer payments, only the portion of the payment which exceeds 5% of a borrower’s monthly income must be included in the DTI calculation. For example, a $500 car payment against $8,000 of monthly income would require $100 to be used in the DTI (5% of $8,000 = $400).

Self-Employed Borrowers
Formerly : In order to use self-employment income on a mortgage application, a borrower was required to show 2 years of work history, which could include time spent in “Training and Education”
Now : In order to use self-employment income on a mortgage application, borrowers must show two years of actual work experience. For self-employment in the same line of work as your previous job, 1 year of work experience may be considered. Tax returns are required.

Overtime Income
Formerly : In order to use overtime income on a mortgage application, borrowers were not required to prove a history of earning such income.
Now : In order to use overtime income on a mortgage application, borrowers must show a two-year history of earning such income. Employer verification may be required.

Part-Time Income
Formerly : In order to use part-time income on a mortgage application, borrowers were not required to prove a history of earning such income.
Now : In order to use part-time income on a mortgage application, borrowers must show a two-year history of uninterrupted part-time income.

Gift Funds
Formerly : Documentation requirements for gift funds were sometimes waived, at the discretion of the underwriter.
Now : Gift funds for downpayment on a home — in addition to “large deposits” into a bank account — must be detailed, sourced, and documented for a mortgage underwriter.