by Ron Bennett (NMLS 57792), Sr. Loan Officer
Since 1934, The Federal Housing Administration (FHA) has been helping people become homeowners by offering low down payments and lenient credit qualification.
FHA has been the loan of choice for many first time home buyers. Without it, many would not qualify or would need to put off their home buying plans for years.
Recently, FHA has made some changes that can affect the way you qualify for a loan. Here are some of those changes.
Deferred Student Loans
We now have to include deferred obligations in your liabilities. For example, student loans, which were not counted if they in a deferred status for at least 2 years, must now be counted as a recurring obligation, and if the monthly payment is not known yet , you have to use 2% of the outstanding balance to establish the payment amount.
That means if you have $30,000 in student loans, the lender will include $600 per month toward your total debt payments.
For installment debts, the lender will use 5% of the outstanding balance. This rule change will probably have the biggest effect on first time home buyers – especially new grads.
Getting Another FHA Loan
In order to obtain an additional FHA loan, and you are relocating, you must establish a new residence in an area more than 100 miles from your current address. This is a change as before there was no limitation.
If you have a loan secured by an interest in a Timeshare, it is now considered as an installment loan and a recurring obligation. Before, they were not considered as an installment. This will also now affect how much you can qualify for.
Hourly wages and Bonus Income
If you are paid hourly wages and the hours vary, we must now average your income for the past two years. Also, if you earn overtime or Bonus income and your income decreases by 20% or more from the previous year, the lender will use your current year’s income even if you made more the year before.
FHA Cash-out Refinance
If you are doing an FHA cash-out refinance, you must prove that you have owned and lived in the property for the last 12 months. The maximum loan to value is 85%.
You will need extra documentation if you have changed jobs more than three times in the last twelve months or have made a change to your line of work. The lender will need transcripts of training or education to show you qualify for the new position, or employment documentation showing continued increases in income and/or benefits.
Closed-end debts (like car loans and furniture loans) do not have to be included in the qualifying debt-to-income ratios if you are paying them off within ten months and all the payments of all debts are less than or equal to 5% of your gross monthly income. Unfortunately, you cannot pay down the debt in order to meet the 10 month requirement. This could be an impact if you have any large debts to pay.
If you have, say, twelve months left to pay on a big debt, it might be worth waiting two months so that the lender does not have to count the payments in your debt-to-income ratio.
FHA Loans Still a Great Tool
Despite the recent changes, FHA is still the most widely available tool for first time home buyers and repeat buyers alike. The reason the loan was created in 1934 was to open up access to homeownership, and that is what FHA is still doing to this day.
I am here and ready to assist you with your mortgage needs. Please contact me if I can help.
Ron Bennett (NMLS 57792, MLO-57792) is a Sr. Mortgage Advisor at Prime Source Mortgage in Bellevue, Washington. Contact Ron at 253.561.9704.