The FHA presented new guidelines for lenders for 2015 and 2016, beginning September 15, 2015. These new guidelines will impact the loan approval process for home buyers applying for mortgages. FHA loans typically target borrowers needing low down payment requirements and lower credit scores, than conventional mortgages.
Loan to Value
Often referred to as the LTV, basically establishes the percentage of the sales price needed as a down payment. Fortunately, the new rules keep the 3.5% minimum down payment the same. Other good news is that more banks are now offering programs beyond FHA loans with 3.5% to 5% down payments, opening the door to more buyers.
Construction loans require 10% down, while refinances require a minimum of 85% equity in the home, for loan approval through the FHA program.
Credit Score Changes
Credit scores are also a factor with regard to the amount needed to qualify for an FHA loan. A 3.5% down payment must accompany a 580 credit score or higher. Those with scores between 500 to 579 must have a minimum of 10% down.
Banks however, often apply higher standards for FHA qualification, and many banks still have a threshold of 620 or 640 to qualify for the 3.5% down payment, despite FHA changes.
- Late payments during the previous two years will continue to come under tighter scrutiny.
- Medical debt is generally disregarded, without requiring a payoff before loan approval.
- Charge offs require a letter of explanation.
- Tax liens must have payments arrangements in place for at least three months.
Debt to Income Qualifications
Student Loan Calculations. Previously, student loans in deferment for the upcoming 12 months could be excluded from the debt-to-income ratios. This enabled the buyer to qualify for larger loan amounts. Now the student loan payments must be included. If the loan is in deferment, the lender must use 2% of the loan balance to account for future payments that will come due. That means if you have a current student loan balance of $30,000, $600 (or the actual payment amount) will be added to your debt payments. This reduces buying power significantly and will result in qualifying for smaller loan amounts.
Paid in Full Credit Card Balances will only be disregarded if 12 months’ worth of statements can show the account was paid in full each month.
Authorized User Accounts are frequently set up by parents to help children establish credit. These accounts will now be counted in the debt-to-income calculations, unless the parent (or account owner) is willing to provide proof they made payments on the account for the last 12 months. Another solution is to delete the authorized user account at least 30 days before applying, if the buyer has other supporting credit established.
Down payment funds must now be sourced even if it is a gift. Parents gifting money for the down payment must now provide bank statements to prove where the money is coming from.
Must have two years of consistent employment either full time or part time. If there are gaps in employment, explanations may be accepted, depending on the lender. Employment gaps greater than six months require six more months of consistent employment to qualify.
While the credit score requirement has been lowered, the other changes are likely to make qualifying for an FHA loan more difficult in the near future.