Posted 07/24/2017


FHA Income & Debt Rules Affect Approvals

New FHA guidelines for income and debt calculations

Mark Greene

The Mortgage Reports Contributor

FHA Changes Its Mortgage Guidelines

FHA mortgages account for nearly one in four closed mortgages nationwide. Getting one, though, is tougher for borrowers "on the margin" than it once was.

The Federal Housing Administration (FHA) changed its mortgage guidelines, affecting how lenders underwrite and approve FHA-insured loans.

The FHA tightened its income verification for self-employed and part-time workers. and changed the ways it treats certain debts, including student loans and credit card balances.

The agency also upped its documentation requirements for gift funds used to purchase a home.

The changes make qualifying a bit harder, but not impossible. FHA loans still have some of the most forgiving qualification standards in mortgage lending.

Rates are low with FHA loans, too.

Since mid-2014, FHA mortgage rates have averaged close to .15 percent lower than Fannie Mae or Freddie Mac. For borrowers with average or below-average credit, it's even better.

Verify your FHA loan eligibility (Apr 26th, 2018)

FHA: Different Treatment For Income & Debt

For today's home buyers who plan to use an FHA-insured home loan, mortgage guideline modifications may make it more difficult to get qualified.

The majority of updates concern the way underwriters calculate income and treat debt on a mortgage application.

The changes don't affect all, or even most FHA applicants. But some, including buyers with student loans, will have to deal with these stricter guidelines.

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 the greater of one percent of the balance, the payment listed on the borrower's credit report, or the actual documented payment, as long as the payment is sufficient to repay the loan over its term.

So underwriters will use at minimum a payment of $250 for a $25,000 loan.

Credit Cards

Formerly : "Authorized" users of a credit card had no responsibility to make monthly payments. Payments did not count toward a borrower's DTI ratio.

Now : Authorized users of a credit card must include the card's monthly minimum payment in their debt-to-income ratio unless they can prove the card's primary owner made the last twelve payments.

Installment Loans / Car Loans

Formerly : Payments for installment loans with ten or fewer months to go did not count in the applicant's DTI.

Now : For installment loans with 10 or fewer payments, underwriters include any portion of the payment exceeding five percent of a borrower's monthly income in the DTI calculation.

If the applicant's income is $8,000, for instance, and she has six months to go with a $500 a month car loan, she'll get hot with a $100 payment.

  • $8,000 * .05 = $400
  • $500 - $400 = $100

Self-Employed Borrowers

Formerly : In order to use self-employment income on a mortgage application, a borrower was required to show two 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, one 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 didn't need 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 did not need 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 : Underwriters could waive verification requirements for gift funds.

Now : Applicants must meet verification requirements down payment gift funds. In addition, "large deposits" must be detailed, sourced, and documented for a mortgage underwriter.

What Are Today's FHA Mortgage Rates?

FHA mortgages are a huge part of the mortgage lending landscape, and mortgage rates look great. Borrowers meeting the agency's minimum mortgage guidelines can buy homes with as little as 3.5 percent down, and in as few as 30 days.

Take a look at today's real mortgage rates now. You don't need to supply your social security number to get started, and all quotes come with instant access to your live credit scores.

Verify your FHA loan eligibility (Apr 26th, 2018)

Mark Greene

The Mortgage Reports Contributor

Mark is a 25-year veteran of the mortgage origination industry and now writes about the inner workings of the industry for Forbes.

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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