FHA mortgages are very popular loans for those people buying their first home and for some that are moving up. FHA allows for slightly higher debt to income ratios, has been easy for those using gift money for down payments and you only need 3.5% for the down payment. There are some major changes coming in September that may affect how much home you can buy. For those that have already talked to a lender, you will want to prepare for these changes.
- Student loan payments: Underwriters can no longer exclude most student loan payments from debt-to-income (DTI) ratios. Currently, FHA allows lenders to ignore student loan payments if they’ve been deferred for at least the following 12 months.
- Downpayment gifts: Lenders will be required to obtain a bank statement from the donor’s account and source any large deposits to that account. This will affect buyers as many parents do not want to provide a bank statement showing how much money is in their account. We have been doing this for a while now, but have had some ways to avoid the actual bank statement. That will go away and we will need the bank statement.
- Short-term debts: Lenders must verify that the borrower paid the outstanding balance on any 30-day accounts, like American Express, in full each month for the past 12 months. If so, they can exclude 30-day accounts paid monthly from the borrower’s DTI ratio. However, 5 percent of the outstanding balance must be included in the debt ratio if borrowers made any late payments over the previous 12 months.
- Related short-term debts: Lenders must include in a DTI ratio all accounts in which the borrower is an authorized user, unless documentation shows that the primary account holder made all required payments over the past 12 months.
- Employment: Lenders must take additional steps to verify and document the stability of the borrower’s income if the borrower changed jobs more than three times in the last 12 months or changed lines of work.
Of these changes, the ones that will affect most buyers are the gift and student loan changes. These changes will take affect with FHA case numbers ordered on or after September 14, 2015. If you are concerned that this will make it more difficult for you to buy a new home, you may want to look soon so you can get a case number prior to September 14th. If you have questions on this, talk to your loan officer.