In September, FHA changed underwriting guidelines and for some home buyers, it may be more difficult to qualify now. FHA is a very popular mortgage program, especially with first time homebuyers. FHA only requires 3.5% down and the interest rates are very good.
Now with all new FHA mortgages, we have some changes – the biggest one is student loan payments. In the past, if you had a student loan payment that was deferred for at least a year after closing, we did not have to include that payment in qualifying. That has changed and now we must include all student loan payments when we are qualifying you for a new mortgage. FHA requires us to use 2% of the outstanding student loan balance unless we can verify a specific payment. A $25,000 student loan will mean a $500 monthly payment in qualifying unless we can document something lower.
Installment loans with less than 10 months of payments remaining – we used to be able to eliminate that debt. If the total remaining payments are less than 5% of the borrower's gross income, we can still exclude that payment. If they are more than 5% of the gross income, we must include that amount in qualifying.
Income changes – this may affect several people. Part time income can only be used if we can show two years of uninterrupted part time income. We have to average the two year history. Overtime income can be used if it has been received for at least two years. There is an exception if it is at least one year of overtime and we can show it is likely to continue based on an employment verification. Self employed borrowers with declining income of more than 20% will not be acceptable. If you are able to show the reduction is a result of extenuating circumstances, you qualify with the reduced income and it has been stable for 12 months, we may be able to use it.
Gift funds – we must document the withdrawal of funds from the donor's bank statement. This means the parents (or family member giving the gift) will have to give us a bank statement showing they have the funds to give. We also have to document large deposits into the donor's bank account. Gift funds can not be used as reserves in FHA transactions.
Even with these changes, FHA will continue to be a very popular mortgage. If you have had a foreclosure or bankruptcy, it's much easier to qualify for a FHA mortgage compared to a conventional mortgage. The down payment is lower and you can have the seller help with closing costs. If you have been pre-approved for an FHA mortgage, you may want to check with your loan officer to make sure these changes will not affect you.