FHA Mortgage Loan Requirements:  Recent Changes

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As of September 15th, 2015, the Federal Housing Administration has changed some of the requirements regarding its loan program for single family homes.  Below we identify some of the biggest changes:

Large Deposits

Large deposits are now defined as more than 1% of the adjusted value of a home for accounts that have been recently opened or that have recent deposits.  The adjusted value of the home is either its appraised value or purchase price minus seller concessions—whichever is the lesser of the two.

For instance, let’s say that a $150,000 home was appraised for $150,000 or more, and seller concessions totaled $3,000.  In this example, a large deposit would be one that is greater than $1,470 (150,000 – 3000 = 147,000; 147,000 x 0.01 = 1,470).

Part-Time Income

Twenty-four months of uninterrupted part-time income are required.  Your income is calculated by taking the average over the preceding 2-year period.  However, pay increases are taken into consideration.  Should you receive a raise, your average is instead calculated over just the past 12 months.

Self-Employed Declining Income

If you’ve experienced a 20% decline in income, you cannot use your income unless there have been extenuating circumstances.  Furthermore, your income would need to have been stable or rising over the past 12 months, and you would need to qualify using your lower income.

Frequent Job Changes

The FHA has special mortgage loan requirements for those who have moved more than three times in the past year for work.  Individuals who fall into this category need to be able to prove that the moves increased their income or benefits, or that they were essential for training.  They also need to be able to provide documentation to this effect.

Overtime and Bonus Income

On your loan application, you can provide 2 years of overtime and bonus income history.  A 1-2 year history is allowable if you have consistently earned overtime and/or bonuses and expect to continue receiving them in the future.

Rent Obtained from Retained Primary Residence

FHA mortgage loan requirements specify that if you relocated for work, your new residence needs to be a minimum of 100 miles away from your previous address.  Additionally, you must possess at least 25% equity in your current property, unless your last tax return includes rental income history.

Non-Taxable Income

Non-taxable income—like social security income or child support—can be included in your qualifying income.  However, the percentage of income that can be added cannot exceed the greater of 15% or the tax rate for that income amount, based on your previous year’s tax rate.

Deferred Loans

Regardless of loan status, loan payments must be included in debt-to-income ratios.  This figure is calculated by using your actual monthly payment.  However, if your payment is $0, the outstanding balance is used as your monthly payment.

Installment Debt with Less than 10 Months

If your installment debt has total remaining payments that are less than 5% of your gross monthly income, these accounts can be excluded from debt-to-income ratios.

30 Day Accounts that Require Payment in Full

If you can present documentation that these accounts have been paid in full for the last 12 months, these types of accounts are excluded from your debt-to-income ratio.  However, if you’ve had any late payments during the preceding year, then 5% of your balance will be included in your debt-to-income ratio.

Authorized User Accounts

If you’ve made on-time payments for the preceding 12 months on an account in which you are the primary holder, this account can be excluded from your debt ratio.

Multiple FHA Loans

You may be able to obtain a second FHA loan if you (1) are relocating for an employment-related reason and (2) your new residence is more than 100 miles away from your current residence.

Acceptable Mixed-Use Properties

Previously, the FHA required mixed-use properties to use no more than 25% of the square footage for business or non-residential use.  However, with the recent change to FHA requirements, that standard has been reduced—now a minimum of 51% of the square footage of a mixed-use property must be intended for residential use.

Rental Income for 2-4 Units

If you buy a property with 2-4 units, rental income from those other units can be added to your qualifying income.  The amount—which is lower than what the FHA permitted before—is determined by calculating 75% of the appraiser’s estimate of fair market rent or the rent based on the lease agreement(s).

Streamlined Refinancing – Net Tangible Benefits

If the total of your principal, interest, and mortgage insurance is no more than $50/month higher than your current loan, a reduction in term is considered an acceptable net tangible benefit.

A home is likely to be the biggest financial investment you make in your lifetime.  If you’re considering buying one, we recommend that you schedule an appointment with a knowledgeable loan officer.  He or she can evaluate your particular circumstances to ensure that your investment is a sound one.

If you have any further questions about these new FHA Loan requirements, get in touch with us here!