FHA Mortgage Guideline Changes Affect Debt and Income Calculations

Scrabble playing pieces spell out debt to income
Photo credit: Simon Cunningham



More proof required, but loans will remain relatively simple to qualify for

The Federal Housing Administration (FHA) made some changes to its mortgage guidelines, which affects lenders underwriting and approval process. Changes include tightening up income verification for self-employed and part-time workers, harder for borrowers “on the margin” to get approved, increased documentation requirements gift funds that are used to purchase a home and treating student loan and credit card debt differently.

While FHA insured mortgages will become harder to qualify for, this type of mortgage, which accounts for nearly a quarter of all closed mortgages nationwide, remain one of the simplest loan types to qualify based on FHA’s common-sense approach to homeownership and qualification standards.

Student Loans

Before: Student loans deferred for a minimum of 12 or more months did not count towards a borrower’s debt-to-income (DTI) ratio.

Now: All loans in deferment will apply toward the borrower’s DTI ratio. FHA will assume the corresponding payment is 2 percent of the outstanding balance, unless a specific payment amount can be documented. If a borrower has $35,000 in student loan debt, FHA will assume a monthly payment of $700.

Credit Cards

Before: Authorized credit card users were not responsible for making monthly payments and payments didn’t count towards the borrower’s DTI ratio.

Now: Authorized credit card users must include the card’s monthly minimum payment in their DTI unless the borrower can provide proof that payments were made by the card’s primary owner by showing 12 months of canceled checks.

Installment Loans / Car Loans

Before: Installment loans with 10 or fewer remaining payments were not included in the borrower’s DTI.

Now: The portion of the payment which exceeds 5 percent of the borrower’s monthly income must be included in the DTI calculation on installment loans with 10 or less remaining payments. For example a $350 car payment compared to a monthly income of $4,000 would require $150 to be used in the DTI (5% of $4,000 = $200).

Self-Employed Borrowers

Before: In order for self-employment income to be considered on a mortgage application, a borrower was required to show two years of work history, which could also include time spent on training or education.

Now: Self-employed borrowers must show two years of actual work experience or one year, if work experience is in the same line of work as a previous job. Tax returns are required.

Overtime Income

Before: Borrowers were not required to prove a history of earning overtime.

Now: In order to use the income from overtime on a mortgage application, a two-year history of earning overtime income must be provided and employer verification may be required.

Part-Time Income

Before: Borrowers were not required to prove a history of earning part-time income.

Now: In order for borrowers to use part-time income on a mortgage application, two-years of uninterrupted part-time income must be provided.

Gift Funds

Before: Documentation requirements were sometimes waived at the discretion of the underwriter.

Now: Funds earmarked for a downpayment or any large deposits into a borrower’s bank account, must be documented and detailed where funds came from, must also be provided to a mortgage underwriter.



The Mortgage Reports. New FHA Rules Affect Approvals, Alter Income & Debt Calculations



Written by: Ari Meier





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